International trade
Short answers:
What Is International Trade? International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, orsupply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes.
New Trade Theory :New Trade Theory tries to explain empirical elements of trade that comparative advantage-based models above have difficulty with. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production (i.e. foreign direct investment) that exists. New Trade theories are often based on assumptions such as monopolistic competition and increasing returns to scale. One result of these theories is the home-market effect, which asserts that, if an industry tends to cluster in one location because of returns to scale and if that industry faces high transportation costs, the industry will be located in the country with most of its demand, in order to minimize cost
Absolute cost advantage theory :A country has an absolute advantage over another in producing a good, if it can produce that good using fewer resources than another country. For example if one unit of labor in India can produce 80 units of wool or 20 units of wine; while in Spain one unit of labor makes 50 units of wool or 75 units of wine, then India has an absolute advantage in producing wool and Spain has an absolute advantage in producing wine. India can get more wine with its labor by specializing in wool and trading the wool for Spanish wine, while Spain can benefit by trading wine for wool. (Adam Smith, Wealth of Nations, Book IV, Ch.2.) The benefits to nations from trading are the same as to individuals: trade permits specialization, which allows resources to be used more productively.
Differences between BOT and BOP :Basis of Difference Balance of Trade (BOT) Balance of Payment (BOP) Balance of payment is flow of cash between domestic country and all other foreign countries. It includes not only import and export of goods and services but also includes financial capital transfer.
1. Definition
Balance of trade may be defined as difference between export and import of goods and services.
2. Formula
BOT = Net Earning on Export - Net payment for imports
BOP = BOT + (Net Earning on foreign investment - payment made to foreign investors) + Cash Transfer + Capital Account +or Balancing Item or BOP = Current Account + Capital Account + or - Balancing item ( Errors and omissions) Balance of Payment will be favourable, if you have surplus in current account for paying your all past loans in your capital account. Balance of payment will be unfavourable, if you have current account deficit and you took more loan from foreigners. After this, you have to pay high interest on extra loan and this will make your BOP unfavourable. To stop taking of loan from foreign countries.
3. Favourable or Unfavourable
If export is more than import, at that time, BOT will be favourable. If import is more than export, at that time, BOT will be unfavourable.
4. Solution of Unfavourable Problem
To Buy goods and services from domestic country. Following are main factors which affect BOT a) cost of production b) availability of raw materials c) Exchange rate d) Prices of goods manufactured at home If you see RBI' Overall balance of payment report, it shows debit and credit of current account. Credit means total export of different goods and services and debit means total import of goods and services in current account.
5. Factors
Following are main factors which affect BOP a) Conditions of foreign lenders. b) Economic policy of Govt. c) all the factors of BOT
6. Meaning of Debit and Credit
Credit means to receipt and earning both current and capital account and debit means total outflow of cash both current and capital account and difference between debit and credit will be net balance of payment.
What is Foreign Exchange? Foreign exchange consists of trading one type of currency for another. Unlike other financial markets, the FX market has no physical location and no central exchange. It operates "over the counter" through a global network of banks, corporations and individuals trading one currency for another. The FX market is the world's largest financial market, operating 24 hours a day with enormous amounts of money traded on a daily basis. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, political and social events at the time they occur, without having to wait for exchanges to open. Access to modern news services, charting services, 24- hour dealing desks and sophisticated online electronic trading platforms has seen speculation in the FX market explode, particularly for the individual trader. The currency markets are not new. They've been around for as long as banks have been doing business. What is relatively new is the accessibility of these markets to the individual speculator, particularly the small- to medium-sized trader.
International liquidity:International liquidity is the part of the concept of international finance. International liquidity is foreign currency or gold in the reserve of any country. It is very useful to pay the amount of imported goods and reduce balance of payment deficit. Every country should increase exports for reducing international liquidity shortage. At micro level, you can understand international liquidity as cash in your pocket for operation of business. If you have building, furniture, plant, equipments and stock but no cash in pocket, you can not survive long term in your business. Just like this, any nation may have lots of natural resources in the form of land, mines and forest but for dealing with foreign country, that nation should have foreign currency in hand.
Objectives of WTO:1.To ensure the reduction of tariffs and other barriers to trade. 2.To eliminate discriminatory treatment in international trade relations. 3.To facilitate higher standards of living, full employment, a growing volume of real income and effective demand and an increase in production and trade in good and services of the member nations. 4.To make positive effect, which insures developing countries especially the least developed secure level of share in the growth of international trade that reflects the needs of their economic development. 5.To facilitates the optimal use of the world’s resources for sustainable development. 6.To promote an integrated, more visible and durable trading system incorporating all the resolutions of the Uruguay Round’s Multi literal trade negotiations.
TRIPs:1) The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) is an international agreement administered by the World Trade Organization (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation. It was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994.
IBRD and its Functions:The International Bank for Reconstruction and Development (IBRD) is one of five institutions that comprise the World Bank Group. The IBRD is an international organization whose original mission was to finance the reconstruction of nations devastated by World War II. Now, its mission has expanded to fight poverty by means of financing states. Its operation is maintained through payments as regulated by member states. It came into existence on December 27, 1945 following international ratification of the agreements reached at the United Nations Monetary and Financial Conference of July 1 to July 22, 1944 in Bretton Woods, New Hampshire. The IBRD provides loans to governments, and public enterprises, always with a government (or “sovereign”) guarantee of repayment subject to general conditions. The funds for this lending come primarily from the issuing of World Bank bonds on the global capital markets—typically $12–15 billion per year. These bonds are rated AAA (the highest possible) because they are backed by member states’ share capital, as well as by borrowers’ sovereign guarantees. (In addition, loans that are repaid are recycled, or relent.) Because of the IBRD’s credit rating, it is able to borrow at relatively low interest rates. As most developing countries have considerably lower credit ratings, the IBRD can lend to countries at interest rates that are usually quite attractive to them, even after adding a small margin (about 1%) to cover administrative overheads.
What are the Main Types of Disequilibrium in BOP ?
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Cyclical Disequilibrium. Secular Disequilibrium. Structural Disequilibrium. Fundamental Disequilibrium.
5 marks:Advantages and disadvantages of international trade:Advantages:1.International division of labour: It makes international division of labour possible. It is universally accepted from the days of Adam Smith that division of labour is advantageous. Different countries can specialise in the production of goods for which they are best equipped only when there exists free international trade. Specialisation and division of labour bring with them a number of advantages such as increase in efficiency and skill and attainment of goods at the lowest possible costs. This certainly adds to the total welfare of the world in general and to the welfare of the participating countries in particular. 2.Facility to the consumers: International trade provides to the consumers the facility of buying their requirements in the market with the lowest prices and with the best quality of the goods. This advantage fall equally on the consumers of all the countries participating in international trade and, therefore, raises the standard of living and total welfare of the people living in all those countries. Besides, some commodities which are almost impossible to be produced at home can be obtained from outside through international trade. For instance, an Englishman, in absence of free international trade, could not have tasted Indian tea, Danish butter, Australian beaf and Brazilian coffee.
3.Economic stability: The economy of a country is subject to “Volatile fluctuations. In an agriculture economy, nature plays tricks with a rhythmic periodicity. In such circumstances, when the country’s economy faces serious set-back in production due to one or other reasons, the population living in the country can readily starve in absence of international trade. It is simply on account of international trade that famines are avoided through deficits of food in some countries being made up from contemporary surplus in other countries. Thus, international trade helps the nations at the time of economic calamities as such calamities are not likely to occur in all the countries simultaneously. 4.Equalisation of prices: Free international trade tends to equalise the prices of goods and services throughout the whole world. The consumption pattern and standards of living tend to be equal in all the countries. What advantage such an equality brings is rather a controversial point yet in this age of ‘Equality, Fraternity and Democracy’ such an equalization would have been advantageous from economic as well as political point of view. 5.Uniform Competition: Where there exists free international trade, the competition prevails all over the world. This makes the home industries to fear of their foreign counterpart. Only the efficient units can survive. Of course, economically speaking only efficient production units must survive. What is the sense in wasting material in inefficient units? In the presence of international trade and hence, competition the less efficient units also try to improve their efficiency so as to be able to face the competition. This certainly increases the overall efficiency of a nation. 6.International understanding: International trade helps in establishing mutual contract between nations. They comd to understand each other. Sometimes, beginning from trades, the nations give up the idea that cash- payment is the sole nexus and start having good relation among themselves. This may help in the establishment of international peace and solidarity. Thus, international trade is considered a very strong guarantee for the maintenance of world peace.
Disadvantages:In the presence of these high sounding and ideal advantages of the international trade there would have been no opposition to free international trade. But unfortunately this is not the case. People do not enter into the foreign trade as freely as they can and not even sacrifice some of their economic interests such as lower costs and lower prices and abstain from international trade. Even in the matters of simple trade between nations every party is ever cautious of the minutest details of the transaction. All this is due to the fact that besides great advantages there are certain disadvantages from the foreign trade and this is why free trade between countries had not been always practical. Though the doctrine of comparative advantage rightly points out the advantages of the trade between countries, yet it is not always on the basis of this that the nations are guided in the matters of trade between themselves. Broadly speaking, the following are the disadvantages which may come into existence in international trade. 1.Undesirable Utilization of resources: There are certain resources such as coal, mica, iron, etc., which are being sent out in the international trade and thus the reserves of these resources which could have been sufficient for the country itself for a long time, might exhaust in a very short period. 2.Dangers to the growing industry: International trade threatens the existence of growing industry of the country in the face of grim competition. 3.Problem of self-sufficiency: By international scale the country’s development is possible only in one direction, i.e., only in the matters of specialised commodities. This tendency presents a great problem of self-sufficiency in times of war and emergency. Suppose the country providing food becomes an enemy of the country that does not produce food, the latter is doomed to starvation.
4.Non-utilisationof resources: There are certain resources in a country which remain unused due to the fact that the commodities which can be produced by their use can be had from abroad at a lower price that at which it is possible to produce them at home.
What are the Main Types of Disequilibrium in Balance of Payments?
The main types of disequilibrium in the balance of payments are as given below: 1. Cyclical Disequilibrium: Cyclical disequilibrium in the balance of payments arises due to business cycles. It is caused (a) by cyclical patterns of income, or (b) by different income elasticity's, or (c) by different price elasticity's. These factors bring changes in the terms of trade as well as growth of trade which, in turn, lead to a deficit or surplus in the balance of payments. When prices rise in prosperity, a country with more elastic demand for imports will experience a decline in the value of imports, thus leading to a surplus in the balance of payments. Conversely, as prices decline in depression, more elastic demand will increase imports and cause a deficit in the balance of payments. These tendencies may, however, be offset by the effects of income changes. High incomes during prosperity increase imports and low incomes during depression reduce imports. 2. Secular Disequilibrium: Secular or long-term disequilibrium in balance of payments occurs because of long-seated and deep-rooted changes in the economy as it moves from one stage of growth to another, (a) In the initial stages of economic development, domestic investment exceeds savings and imports exceed exports. Disequilibrium occurs due to lack of funds to finance the import surplus, (b) Then comes a stage when domestic savings tend to exceed domestic investment and exports exceed imports. Disequilibrium arises because the surplus savings exceed investment opportunities abroad, (c) At a still later stage, domestic savings tend to equal domestic investment and long-term capital movements on balance become zero. 3. Structural Disequilibrium: Structural disequilibrium in the balance of payments occurs when structural changes in some sectors of the economy alter the demand and supply forces influencing exports and imports. According to Kindleberger, structural disequilibrium may be of two types:
(i) "Structural disequilibrium at the goods level occurs when a change in demand or supply of exports or imports alters a previously existing equilibrium or when a change occurs in the basic circumstances under which income is earned or spent abroad, in both cases without the requisite parallel changes elsewhere in the economy." (ii) "Structural disequilibrium at the factor level results from factors which fail to reflect accurately factor endowments i.e., when factor prices, out of line with factor endowments, distort the structure of production from the allocation of resources which appropriate factor prices would have indicated." Structural disequilibrium is caused by changes in technology, tastes and attitude towards foreign investment. Political disturbances, strikes, lockouts, etc., which affect the supply of exports, also cause structural disequilibrium. 4. Fundamental Disequilibrium: The term fundamental disequilibrium has been originally used by the I.M.F., to indicate a persistent and long-term disequilibrium in a country's balance of payments. Fundamental disequilibrium is generally caused by dynamic factors and particularly leads to chronic deficit in the balance. The main causes of fundamental disequilibrium are: (a) excessive or inadequate internal demand for foreign goods; (b) excessive or inadequate competitive strength in the world market; (c) excessive capital movements.
Differences Between Internal And International Trade:There are certain special features, which differentiate internal trade from international trade. They are explained as following manner:
•Demand and Supply: Demand and supply cannot work out their full effects where foreign trade is concerned. Where as
such factors can work out their full efforts in the case of internal trade.
•Artificial Barriers to Trade: The natural difficulties may be increased by artificial barriers to trade, either through prohibitive
laws as in war time of through customs duties or protective tariffs in the context of international trade.
•Differences in Economic Environment from country to country: Different countries have different facilities in carrying out
their productive activities. Differences in system of national and local taxation, regulations for health, sanitation, factory organisation, education and insurance, policy regarding the transport and public utilities, laws relating to industrial combinations and trade, etc., do exist as between countries. These differences bring about a difference in the costs of production between them.
•Currency differences are still more important because of the fact that exchange is thereby hampered. For instance, if an
Indian manufacturer wishes to sell goods in the U.S.A or English, he must know the value of the U.S.A or England currency units in terms of Indian money. Apart form this, each country is under the control of a separate central bank, each following a separate monetary policy which may greatly affect the foreign trade of the country.
•The geographical and climatic conditions may give rise to territorial division of labour and localization of industries. Some
countries may have natural resources is abundance such as iron ore, coal, etc., whereas in some other countries climatic conditions give advantages to them.
•Long-distance: International trade is predominantly long-distance. This may affect the transport costs and the mobility of
the different factors of production.
•Preference: Preference for home and the prejudice against foreigners remain as one of the major factors that would explain
as to why the rates of earning of the different of equal efficiency would not be equalized between different countries.
What Is an Exchange Rate?
An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is the value of another country's currency compared to that of your own. If you are traveling to another country, you need to "buy" the local currency. Just like the price of any asset, the exchange rate is the price at which you can buy that currency. If you are traveling to Egypt, for example, and the exchange rate for U.S. dollars is 1:5.5 Egyptian pounds, this means that for every U.S. dollar, you can buy five and a half Egyptian pounds. Theoretically, identical assets should sell at the same price in different countries, because the exchange rate must maintain the inherent value of one currency against the other.
Fixed Exchange Rates:There are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged. If, for example, it is determined that the value of a single unit of local currency is equal to US$3, the central bank will have to ensure that it can supply the market with those dollars. In order to maintain the rate, the central bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the central bank that it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation/deflation) and ultimately, the exchange rate. The central bank can also adjust the official exchange rate when necessary.
Floating Exchange Rates:Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting," as any differences in supply and demand will automatically be corrected in the market. Look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and stimulating demand for local goods and services. This in turn will generate more jobs, causing an auto-correction in the market. A floating exchange rate is constantly changing. In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can also influence changes in the exchange rate. Sometimes, when a local currency reflects its true value against its pegged
currency, a "black market” (which is more reflective of actual supply and demand) may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market. In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation. However, it is less often that the central bank of a floating regime will interfere.
Flexible Exchange Rates:A final reservation concerning flexible exchange rates is of prime importance. This kind of argument is that internal and external economic matters are so inextricably entwined, that even flexible exchange rates will not insulate the domestic economy from happenings abroad over which no single nation has control.
The argument underscores the need under any financial arrangement for international cooperation.
When international movements of capital flow freely changes in the domestic level of interest rates relative to those abroad affect the volume and direction of capital flows.
Most capital movements also affect the supply or demand of foreign exchange and therefore the level of the exchange rate which in turn affects the current account balance.
Consider country 'A' in 'internal balance' with full employment and reasonable price stability. If interest rates abroad rise, capital outflows from country A to foreigners will increase.
This causes a depreciation in country A's currency. The depreciation in turn causes an increase in net exports, thereby raising demand in country A and inducing inflation.
The country's monetary policy must react to the exchange rate movement to stop the inflation.
In other words, the domestic policy of country A is not independent or isolated, but must be coordinated in a very basic sense with policies abroad over which A has no voice or control.
Opponents of flexible exchange rates generally use one or more of the arguments to show that flexible exchange rates will be unstable exchange rates.
Indeed, flexible exchange rates can be unstable rates, since the demand and supply of foreign exchange depend on among other factors.
Relative international prices, relative rates of growth in national incomes, and international interest rates differentials--- a prolonged movement of one or more of these variables for a country which is out of step with the rest of the world will introduce prolonged one-way movements in the demand or supply of foreign exchange and of the exchange rate.
Once it is clear that the movement in the exchange rate will be in one direction only, private speculators will line up on one side of the market only.
Moreover, this forces a more rapid and destabilizing movement in the rate which can only be stopped by massive contraspeculation by the country's monetary authorities and by fundamental changes in domestic policies.
But the advantage of flexible rates lies in meeting once-and-for-all changes in international relationships.
To cope with a bout of inflation which is eventually stopped in the country of origin, a flexible exchange rate will realign international price relationships without a deflation of equal magnitude to bring the foreign balance back into equilibrium.
It appears then, that so long as a country's prices, growth rate, and interest rates do not get flagrantly out of line with those of its trading partners, a flexible exchange rate will be a basically stable one, and will ease the adjustment to once-over changes with economic conditions abroad.
But coordination of policies with those abroad is a necessary factor in keeping the exchange rate stable.
Essay on the Achievements of International Monetary Fund:Undoubtedly the IMF has made a remarkable success in achieving most of its principal objectives: 1. The primary goal of the IMF was to promote stability in exchange rates. The measure of exchange stability that the world has witnessed in the IMF era is remarkably superior to what was seen during the inter-war period or gold standard regime. Under IMF arrangements, stable exchange rates do not imply rigid exchange rates. IMF's object is to combine the merits of stability with flexibility in exchange management. It is aimed at avoiding competitive exchange depreciations by requiring members to declare the par values of their currencies fixed in terms of gold or the U.S. dollar. However, it permitted an orderly adjustment of exchange rates when this was needed for correcting fundamental disequilibrium in a country's balance of payments. The recent devaluation of the Indian rupee (in 1966) and that of pound-sterling were justified by the IMF. 2. The IMF also served as an expert institution for consultation and guidance in international monetary matters. It serves as an excellent forum for discussions, practically on a day-to-day basis, of the economic, fiscal and financial policies of member nations, with particular reference to their balance of payments impact. The Fund has created a feeling among the member nations that, their economic problems are not their exclusive concern but of the whole international society. 3. The Fund has contributed in certain ways to the expansion of world trade. By providing credit facilities to member countries, the IMF has reduced the need for their imposing import quotas and resorting to exchange controls. It assists the deficit countries in meeting their temporary disequilibrium in the balance of payments. It also "works for facilitating multi-lateral payments and trade, promoting thereby, international trade as a whole.
4. In recent years the Fund has achieved some success in bringing about a simplification of the multiple exchange system at least in countries that have sought financial assistance from the Fund. 5. The Fund has been instrumental in ensuring steady progress in the establishment of a multilateral system of payments in respect of current transactions. However, little success has been achieved in this direction due to agencies and organisations out of the Fund's purview. 6. In the beginning, the Fund pursued a conservative credit policy, refusing loans for any purpose other than correcting a fundamental disequilibrium in the balance of payments. Moreover, the IMF credit was of short-term duration only. Lately, however, the Fund has changed its attitude by accepting a more liberal credit policy. Today, the Fund grants development loans, too. Hence, the quantum of borrowings from the Fund has shown a marked increase in recent years. 7. In a nutshell, the Fund has thus, been able to secure all the advantages of managed paper standard by maximising employment and accelerating the pace of economic development and of the gold standard by maintaining comparative economic stability, while carefully avoiding the disadvantages of either. 8. Moreover, the Fund has been particularly interested-in the newly developing countries of the world and has been liberally assisting them to maintain a healthy balance of payments and monetary stability at home. In recent years, however, underdeveloped countries have started looking to the Fund to assist them in their economic development programme also. Furthermore, most of the new member countries who have acquired independence recently are facing difficult problems in organising their monetary, fiscal and exchange systems. These countries, thus, require Fund's growing assistance in constructing a solid monetary and exchange base for their economic growth. The Fund has been already providing technical assistance to its members in this respect, but now its activity is substantially widened to meet this challenge. In many of these countries, the Fund's experts have assisted in the formulation of appropriate monetary, fiscal and exchange policies or in the implementation for stabilisation programmes. Besides, the Fund has organised, since 1964, a Fiscal Affairs Department whose officers advise member countries on matters relating to tax policy, tax systems, tax administration, budgeting, etc. The Fund has also organised the Central Banking Advisory Service to provide technical advice to newly developing countries to establish or improve their central banks. An IMF Institute is also started by the Fund in 1964 to train the officials of member nations.
The International Monetary Fund or IMF came into existence in 1945, after the end of World War II and at the beginning of the Cold War. Currently, the IMF has its headquarters in Washington, D.C. and comprises 185 member nations. Considering its growing relevance as an international lender that offers financial and technical aid to its member nations, understanding the IMF is key understanding modern global economics. Reasons for Founding the IMF:In an American town called Bretton Woods in New Hampshire, representatives of 45 western countries, led by the US and UK, and not including the Soviet Union and communist bloc countries, agreed to establish a global economic institution. Of these, 29 countries signed the Articles of Agreement that included the following objectives.,
• Eliminate any disastrous repetitions of the Great Depression.
• Facilitate global financial stability by stabilizing prevailing exchange rates.
•Reduce poverty so that economic growth is triggered.
•Increase international trade and employmen
Main Countries In the IMF:The main member of the IMF is the US, which also enjoys exclusive veto power. Other countries that enjoy voting rights are Japan, Germany, France, China and the UK as its main member. Based on the quota system, the IMF assigns each member country with voting power, subscriptions and special drawing rights (SDRs). Presently there are memberships of 184 countries over the world and a staff of approximately 2,680 from 139 countries. Total Quotas to the extent of $312 billion (as of 8/31/05). Loans outstanding $71 billion to 82 countries, of which $10 billion to 59 on concessional terms (as of 8/31/05) and technical Assistance provided 381 person years during FY2005.Surveillance consultations concluded 129 countries during FY2005, of which 118 voluntarily published information on their consultation. Responsibilities of IMF:Article 1 sets out main responsibilities of IMF which are asfollows, 1) Promotinginternational monetary cooperation.
2) Facilitating the expansion and balanced growth ofinternational trade. 3) Promoting exchange stability. 4) Assisting in the establishment of a multilateral systemof payments and 5) Making its resources available (under adequatesafeguards) to members experiencing balance of payments difficulties.
Generally, the IMF is responsible for ensuring the stabilityof the international monetary and financial system the system of internationalpayments and exchange rates among national currencies that enables trade totake place between countries. The Fund seeks to promote economic stability andprevent crises; to help resolve crises when they do occur; and to promotegrowth and alleviate poverty. It employs three main functions: surveillance technical assistance lending to meet these objectives.
How the IMF Works:The main functions of IMF can be divided into three categories: Surveillance: This involves collaboration between the IMF and its member nations. The IMF continues to assess the economic conditions of its members and offers in-depth advice to help them formulate sound economic policies. Lending: Financial aid is provided to member countries who are struggling with balance of payment problems. Through Exogenous Shocks Facility (ESF) and the Poverty Reduction and Growth Facility (PRGF), the IMF helps its members and even collaborates with the World Bank to lend money to them. Technical Assistance: The IMF offers technical assistance in areas such as banking, fiscal and economic policies as well as exchange rate policies. It also helps its member nations to fight threats such as terrorism and money-laundering.
Achievements and Challenges of the IMF:It would take an entire book to cover all the achievements of the IMF but here are some that are worth recollecting:
•The IMF triggered Poland’s economic transition. The transition included institution building, liberalization, and macro-economic management.
•Initiatives by the IMF initiatives triggered economic growth, liberalized prices and the spread of democratic institutions in countries like the Czech Republic, the Slovak Republic the Baltics and Hungary.
•In 2008, the Asia Pacific region made considerable progress in addressing downside risks to economic growth. Gaining sufficient political muscle to grapple with issues that affect economic prosperity, offering speedy solutions to crises and ensuring economic transition for developing nations are some of the challenges ahead for the IMF. Critics of the IMF say that its policies often make economic crises worse because of the severity of some of the austerity measures it imposes. As the global lender of last resort, sovereign nations will normally try to find any other means they can of solving their own problems before turning to the IMF. Whichever way you look at it, with the growing risks in the global financial system, the Fund is going to be busy in the coming years, and will continue its supporting role to help countries stabilize their commodity and oil prices, pursue expansionary policies and reduce inflation. IMF Activities - Highlights: * The IMF works to promote global growth andeconomic stability and there by prevent economic crisis by encouraging countries to adopt sound economicpolicies. Act ofbeing vigilant is the regular dialogue and policy advice that the IMF offers toeach of its members. Generally once a year, the Fund conducts in-depthappraisals of each member country's economic situation. It discusses with thecountry's authorities the policies that are most conducive to stable exchangerates and a growing and prosperous economy. Members have the option to publishthe Fund's assessment, and the overwhelming majority of countries opt for transparency,making extensive information on bilateral surveillance available to the public.The IMF also combines information from individual consultations to formassessments of global and regional developments and prospects. These views onthe IMF's multilateral surveillance are published twice each year in the worldeconomic outlook and the global financial stability report. Technicalassistance and training are offered - mostly free of charge - to help membercountries strengthen their capacity to design and implement effective policies.Technical assistance is offered in several areas, including fiscal policy,monetary and exchange rate policies, banking and financial system supervisionand regulation, and statistics. * Inthe event that member countries do experience difficulties financing their balance of payments, the IMF is also afund that can be tapped to help in recovery.
Financial stabilityis available to give member countries the breathing room they need to correctbalance of payments problems. A policy program supported by IMF financing isdesigned by the national authorities in close cooperation with the IMF, andcontinued financial support is conditional on effective implementation of thisprogram.
*The IMF is also actively working to reduce poverty in countries around the globe,independently and in collaboration with the World Bank and other organizations. The IMFprovides financial support through its concessional lending facility - thepoverty reduction and growth facility (PRGF) - and through debt relief under theHeavily indebted poor countries (HIPC).
WTO vs GATT: Main Differences:For several decades, the General Agreement on Tariffs and Trade was applied on a provisional basis. It was a multilateral agreement containing rules relating to trade in goods, and although it operated like a permanent agreement, it was without a permanent institutional framework, and was serviced by an ad hoc Secretariat. The WTO now provides a permanent institutional framework for the multilateral trading system, with its own Secretariat. In addition, the WTO not only covers trade in goods, as the GATT rules did, but also trade in services and trade-related aspects of intellectual property rights. Also, the dispute settlement mechanism has been considerably strengthened in the WTO.
3.1 Nature The GATT was a set of rules, with no institutional foundation, applied on a provisional basis. The WTO is a permanent institution with a permanent framework and its own secretariat. 3.2 Scope The GATT rules applied to trade in goods. The WTO Agreement covers trade in goods, trade in services and trade-related aspects of intellectual property rights. 3.3 Approach Whilst the GATT was a multilateral instrument, a series of new agreements were adopted during the Tokyo Round on a plurilateral-that is, selective-basis, causing a fragmentation of the multilateral trading system. The WTO has been adopted, and accepted by its Members, as a single undertaking: the agreements which constitute the WTO are all multilateral, and therefore involve commitments for the entire membership of the organization. 3.4 Dispute settlement
The WTO dispute settlement system has specific time limits and is therefore faster than the GATT system; it operates more automatically, thus ensuring less blockages than in the old GATT; and it has a permanent appellate body to review findings by dispute settlement panels. There are also more detailed rules on the process of the implementation of findings.
What are the Problems or difficulties in international trade:International trade is characterised by the following special problems or difficulties.
1. Distance: Due to long distance between different countries, it is difficult to establish quick and close trade contacts between traders. Buyers and sellers rarely meet one another and personal contact is rarely possible. There is a great time lag between placement of order and receipt of goods from foreign countries. Distance creates higher costs of transportation and greater risks. 2. Different languages: Different languages are spoken and written in different countries. Price lists and catalogues are prepared in foreign languages. Advertisements and correspondence also are to be done in foreign languages. A trader wishing to buy or sell goods abroad must know the foreign language or employ somebody who knows that language. 3. Difficulty in transportation and communication: Dispatch and receipt of goods takes a longer time and involves considerable expenses. During the war and natural calamities, transportation of goods becomes even more difficult. Similarly, the costs of sending or receiving information are very high. 4. Risk in transit: Foreign trade involves much greater risk than home trade. Goods have to be transported over long distances and they are exposed to perils of the sea. Many of these risks can be covered through marine insurance but increases the cost of goods. 5. Lack of information about foreign businessmen:
In the absence of direct and close relationship between buyers and sellers, special steps are necessary to verify the creditworthiness of foreign buyers. It is difficult to obtain reliable information concerning the financial position and business standing of the foreign traders. Therefore, credit risk is high. 6. Import and export restrictions: Every country charges customs duties on imports to protect its home industries. Similarly, tariff rates are put on exports of raw materials. Importers and exporters have to face tariff restrictions. They are required to fulfil several customs formalities and rules. Foreign trade policy, procedures, rules and regulations differ from country to country and keep on changing from time to time. 7. Documentation: Both exporters and importers have to prepare several documents which involve expenditure of time and money. 8. Study of foreign markets: Every foreign market has its own characteristics. It has requirements, customs, weights and measures, marketing methods, etc., of its own. An extensive study of foreign markets is essential for success in foreign trade. It is very difficult to collect accurate and up to date information about foreign markets. 9. Problems in payments: Every country has its own currency and the rate at which one currency can be exchanged for another (called exchange rate) keeps on fluctuating change in exchange rate create additional risk. Remittance of money for payments in foreign trade involves much time and expense. Due to wide time gap between dispatch of goods and receipt of payment, there is greater risk of bad debts. 10. Frequent market changes: It is difficult to anticipate changes in demand and supply conditions abroad. Prices in international markets may change frequently. Such changes are due to entry of new competitors, changes in buyers' preferences, changes in import duties and freight rates, fluctuations in exchange rates, etc. 11. Investment for longer period: There is longer time gap between supply of goods and receipt of payment. Therefore, the exporter's capital remains locked up over a longer period. 12. Intense competition: Traders who want to sell goods abroad have to face severe competition from different countries. Considerable market research is necessary to ensure suitability of product in foreign markets. Heavy expenditure on advertising and sales promotion may be necessary.
India after Independence Essay
Before independence our country was at the mercy of her foreign rulers. They did whatever they liked for the good of their own country. After independence much has been done to improve the condition of the masses. Some of the important achievements of free India made during the last fifty years are as follows. In the economic field, unprecedented progress has been made. Our five year plans have been successfully completed. Many Multipurpose projects have been taken in hand. Bhakra Nagal, Hirakud and Damodur valley projects have been completed. Many new factories have been started. Sindri Fertilizers Factory, Haldia Fertilizer Complex, Barauni and Guna Fertilizer Factory etc., are producing chemical fertilizers. Important Steel plants are fulfilling our requirements of steel. The per capita income has been raised. Our exports have been increasing in different spheres. The difficult food problem has been solved. To-day there is enough food for all. Power –generation has also been increased several folds. A net-work of ordinance factories has been established and most sophisticated weapons for the defense of the country are being produced. In 1989, India successfully fired Agni, a long range missile. Since then ‘Akash’ surface to air long range missile, ‘Trishul’, ‘Nag’ and recently ‘Prithivi’ surface to surface short range missile have been launched. This shows further advance in the growth of the country’s science and technology. Rapid advances have been made in the field of electronics and comprehensive program of computerization is also under way. Thus gradually, but steadily, we are achieving self-sufficiency and stability in the economic field. Free India has also made rapid advance in the field of science and technology. Atomic energy has been successfully used for power generation. India successfully conducted under ground atomic tests for peaceful purposes. Now India is nuclear power nation. The launching of “Aryabhatta”, “Rohini”, “Apple” INSAT-1 and INSAT-1(D) satellites marks the entry of India in to the space age. Since then many more multipurpose satellites have been sent in to outer space. India Space Organization had completed four launchers of the Satellite Launch Vehicle-3(SLV-3) for of Augmented Satellite Launch Vehicles (ASLV) and two developmental PSLV. With this India became the fifth nation in the world capable of launching 1000 kg satellite in its intended orbit. Now it is ready to enter the GSLV programme through which India will not only have vastly improved telecommunication capability, but also satellite monitoring capabilities which will be of great value of our security. Revolutionary changes have also been brought about in the political field. Our country is now sovereign Democratic Republic. All citizens have equal rights in the eyes of law, irrespective of their caste, creed, sex and religion. To bring democracy to the villages, Panchayats have been established and Panchayati Raj has become a reality. The launching of the Jawahar Rozgar Yojna is another revolutionary step to improve the conditions of rural poor. There is a general awakening among the people. They have begun to understand their rights and duties. We may find men in the street discussing various political problems with great interest. Thus, we are enjoying the fruits of freedom. We may hold our heads high due to the success of foreign policy, which has raised the prestige of the country. Achievements in the social sphere are also clearly visible. The Zamindari system has been abolished. The tiller of the land is now its owner. Untouchability is a legal offence today. To drive out the demon of drink
from society, prohibition has been introduced. Socialistic pattern of society is the aim towards which our country is making rapid progress. To reduce the inequalities in the industrial field many industries have been nationalized. To bring about uniformity in weights and measures, the metric system has been introduced. Prostitution, in any form has been made legal offense. These achievements are of great social significance. Social security schemes have been introduced in some big industrial towns. The government is busy in clearing slums and constructing new houses for the industrial workers and the weaker sections of society. Lakhs of refugees came to India first from Pakistan, then from Bangladesh, and more recently from Ceylon. But India has successfully solved the refugee problem. This is a mighty achievement. So it becomes clear that no aspect of life has been left untouched. India has successfully followed the policy of noon alignment. As a result of India’s efforts, the nonalignment movement has become a force in the world affairs. India’s voice now carries weight in international forums. Important laurel won by India recently is the obtaining of the sole right for the exploration of a very large area of the Indian Ocean for its mineral wealth. Similarly, India has established its base in the Antarctica for exploration and research in the difficult region. But this long list of free India’s achievements should not make us proud. We should not feel satisfied by looking at our achievements. We should keep in mind the problems which are yet to be solved. The masses of country are still poor and backward. Many social evils still prevail. Corruption is widespread. Terrorism is raising its ugly head in several arts of the country. The balance of payment position is difficult and threat sanctions are looming large. To face various economic problems a comprehensive programme of economic reforms has been undertaken. Economic polices have been liberalized, a number of controls have been removed, and multinationals have now been allowed to operate freely in the country. Private enterprise has also been encouraged, and Indian capitalists have been invited on a large scale to set up industries in various field. Above all the appeal of democracy has depended over the years. This style of governance has neatly fitted the lifestyle of a majority of Indians. Democracy now cuts across the parties, educational levels, classes, castes, religions, and gender and ethnics divisions. Indeed India democracy today despite all its institutional problems is stronger in the minds of people then it ever was. The social and territorial spread of legitimacy has survived even the sharp decline in the peoples trust in politicians in recent years. However with faith in our leaders and our capacity for works, we are sure to overcome our present difficulties. The present difficulties should not discourage us. Free India is destined to become a powerful nation of the world.
Brief notes on India’s Foreign Trade
rior to British rule, India was famous in the world for its exportable items, which were bused on cottage and small scale industries. But during the British period India was forced to change its pattern of trade, exporting only the raw materials for British industries and importing the final products to provide a market of the English industries. Before the Second World War, India was bound to export more than its import, in order to meet the unilateral transfer payments in the shape of salaries and pensions for British officials in India, resulting in a favourable balance of trade position. The direction of trade was pointed towards U.K. amounting 31 per cent of India's total import during 1938-39. However a considerable change in the composition, pattern and direction of trade took place during the planning era, though the deficit in the balance of payment account is increasingly is becoming high. Foreign Trade during Plan Periods The First Plan: During the First Plan, the deficit in the balance of payment was worked out to be Rs 108 crores per annum. This was basically due to the import of developmental capital goods. However, there was no change in the export side during the plan period. The Second Plan (1956-57-60-61): The import of the country increased significantly during the 2nd plan period, as there was a change in the very structure of the economy. Due to the implementation of the Mohalanobis model, huge investment was to be made on basic and key industries. Foreign technology, technical know-how and concessional capital constituted the main items of India's import. Further to meet the internal shortage, enough amounts of food grains had to be imported. The export during the period also slowed down and the much needed diversification of export and exportpromotion did not materialise. There was an acute shortage of foreign exchange due to the unfavorable balance of payment situation. The Third Plan (1961-62-65-66): During the 3rd plan period, the average import of the country was at Rs 1,224 crores, while the corresponding import was only Rs. 747 crores, resulting in a huge trade deficit. The basic reason for this situation is the need for higher import for our materials and industrial and technical know-how and food grains during the period. Devaluation of 1966 and period up to 1973-74: Due to a continuous adverse balance of payment situation since 1951, acute foreign exchange position, growing international borrowing from abroad, India was compelled to devaluate the value of Rupee by 36.5 per cent in June 1966. Due to failure of agriculture, import of food grains became necessary which resulted in a further trade deficit.
However, due to favourable agriculture and reduction of food grain import, along with import restriction and export promotion measures, during 1972-73, the country was able to have a favourable balance of trade position. But in the next year, due to increase in the price of petroleum products, chemical fertilizer and newsprint in the global market again the deficit cropped up. However, the magnitude of deficit during 4th plan period was less than its earlier period. The Fifth Plan (1974-75): The value of imports during this period touched a very high level due to increase in prices of petroleum products, fertilizer and food grains. Export during the period also increased significantly, in fish, fish preparations, coffee, groundnuts, tea, cotton fabrics and ready-made garments. During 1976-77, the country experienced a trade surplus. However during 1977-78 and in the next two years due to a unsystematic liberal import policy, along with stagnant export, the balance of trade became negative. The Sixth and Seventh Plan: Due to a further increase in the price of petroleum products, the import bill increased from Rs. 6,814 crores in 1978-79 to Rs.13, 608 crores in 1981-82. The outcome was unprecedented trade deficit, though the export increased considerably during the period. The average annual import during the 7th Plan was Rs 28,874 crores but export average stood up at Rs. 18,033 crores. The trade deficit compelled the Govt. to borrow Rs. 6.7 billions from World Bank and IMF. Foreign trade from 1989-90 to 93-94: In spite of a rise in exports, trade deficit shot up to a high figure of Rs. 10,635 crores due to increase in import value as an outcome of Gulf War. During 1991-92, the Govt. went for drastic import reduction and took many policies to increase export. But export in dollar-term did not rise. This was mainly due to the decline in export to Rupee Payment Area (RPA) by 42.5% in dollar terms during 1991-92. During 1991-93, trade-deficit further worsened. The import of oil rose by 13.5%. The disintegration of USSR resulted in an export decline. However, the exports to General Currency Area (GCA) rose by 10.4% in 1992-93, but in RPA it further declined. During 1993-94, export promotion measures, export increased by 19.6%, while the import increased by 6.1%. This resulted in a decline in trade deficit, which requires further to be sustained over a long period of time. The main features of foreign trade are as follows: (1) Growing value of trade, (2) Large growth of import, (3) Inadequate expansion of exports. (4) Resulting widening trade deficit.
Introduction: The World Trade Organization is a Multi-lateral organization which facilitates the free flow of goods and services across the world and encourages fair trade among nations. The result is that the global income increases due to increased trade and there is supposed to be overall enhancement in the prosperity levels of the member nations. To put it in brief WTO encourages a multi-lateral trading system within its member countries. Origin and Evolution of WTO: - GATT to Uruguay WTO is of a very recent origin, it came into formal existence on January 1st 1995. As an organization it has vast powers and functions than what its predecessor GATT (General Agreement on Tariffs and Trade) had, the objectives and goals of both being broadly the same. GATT came into existence in the year 1948, after long negotiations to form an organization called ITO immediately after the Second World War did not materialize. The ITO was supposed to be the third international organization in the "Golden Triangle" that was supposed to come into existence, the first two being IMF and World Bank. To begin with 23 countries became founding GATT members (officially, "contracting parties"). GATT remained the only multilateral instrument governing international trade from 1948 until the WTO was established in 1995. There were several controversies on whether the GATT had actually contributed to enhancement of world trade and did it serve its purpose of a multi-lateral trading organization. The liberalization of international trade during GATT era in its true sense was always debatable. However, it is very clear that over the period of 47 years of its existence, GATT was successful in initiating a process of tariff cutting in several groups of manufactured goods. Moreover the signatories in the GATT increased from 23 to more than 100 in a short span, ratifying the fact that being in the system was proved and considered more beneficial than not being in it. On the other front, the internal and domestic economic problems and fluctuations made some economies to go back to increase the levels of protection and increase trade barriers to enable faster domestic growth and recovery. The problem was not just a deteriorating trade policy environment, but some other serious issues. GATT negotiations did not include services and agricultural trade in its gamut. As the world trade grew in size, the share of services trade along with that of merchandise started to increase leading to the insufficiency of the GATT principles to cover the expanding aspects of ever evolving global trade. As a result, these loopholes were taken as advantage by many trading countries, resulting in a lopsided development of world trade. These and other factors convinced GATT members that a new effort to reinforce and extend the multilateral system should be attempted. That effort resulted in the Uruguay Round, the Marrakesh Declaration, and the creation of the WTO. WTO - Some Basic Facts: Location: Geneva, Switzerland Established: 1 January 1995 Created by : Uruguay Round negotiations (1986-94) Membership: 148 countries (as of April 2005) Budget: 155 million Swiss francs for 2003 Secretariat staff: 560 Head : Director-General, Supachai Panitchpakdi
What are its Objectives and Functions? The overriding objective of the World Trade Organization is to help trade flow smoothly, freely, fairly and predictably; to meet its objective WTO performs the following functions ? ? ? ? ? ? ? Administering W.T.O Trade Agreements. Acting as a Forum for trade negotiations. Settling and Handling Trade disputes Monitoring and reviewing national trade policies, Assisting the member in trade policies through technical assistance and training programmes Technical assistance and training for developing countries. Co-operation with other International Organization
What are its Principles? The agreements of WTO cover everything from trade in goods, services and agricultural products, these agreements are quite complex to understand, however all these agreements are based on some simple principles; ? Non-Discrimination This is a very simple principle which advocates that every member country must treat all its trading partners equally without any discrimination, meaning that if it offers any special concession to one trading partner, such concessions need to be extended to its other trading partners as well in entirety. This principle effectively gets translated into "MFN" or the Most Favored Nation. However, this principle is relaxed in certain exceptional cases, such as if country X has entered into a regional trade agreement with another country Y, then the concessions extended to Y country need not be extended to other non-members of the agreement. Besides these developing countries facing Balance of Payment problems also get concessions, and if a country can prove unfair trade it can retain its power to discriminate. The Non-discrimination principle is also translated as a principle that would ensure "National Treatment" to all the goods, services or the intellectual property that enters any other countries national borders. ? Reciprocity This Principle reflects that any concession extended by one country to another need to be reciprocated with an equal concession such that there is not a big difference in the countries Payments situation. This was further relaxed for developing countries facing severe Balance of Payments crisis. This principle along with the first principle would actually result in more and more liberalization of the world trade as any country relaxing its trade barriers need to extend it to all other members and this would be reciprocated. Thus progressive liberalization of the world trade was aimed at by WTO. ? Transparency The multilateral trading system is an attempt by governments to make the business environment stable and predictable. Thus this principle ensured that there is lots of transparency in the domestic trade policies of member countries. Moreover, the member countries are required to sequentially phase out the non-tariff barriers and progressively reduce the tariff barriers through negotiations.
Thus, these principles were primarily to serve the purpose of freer and fair trade and also to encourage competitive environment in the global market. This was further supposed to enhance development and Economic reforms in the developing countries over a period of time in a phased manner. What are the Major Agreements in WTO? There are several agreements which are agreed upon by member countries in the last round of negotiations under GATT, The Uruguay round (1986-94), which resulted in the formation of WTO The complete set runs to some 30,000 pages consisting of about 60 agreements and separate commitments (called schedules) made by individual members in specific areas such as lower customs duty rates and services market-opening. The main agreements cover vast areas from tariff reduction on specific manufactured goods and services; other agreements deal with trade in Textiles, Agriculture, Services; some other agreements talk about trade in Intellectual Property, cross-border Investments, anti-dumping duties, CVD's, Safeguards, and finally there are few agreements that aim to reduce the Non-Tariff Barriers that hinder trade between countries. Let us now discuss the decision making process followed to reach consensus for these agreements at WTO, the organizational structure and then in detail look at the impact of these agreements on the member countries with specific reference to India. The Decision Making Process and Organizational Structure of WTO Decisions are made by all the members together what we can term as by consensus. A majority vote is also possible but it has never been used in the WTO, and was extremely rare under the WTO's predecessor, GATT. After the decision by individual countries, the WTO's agreements have been ratified in all members' parliaments. The structure of WTO is shown in Figure 1. The WTO's top level decisionmaking body is the Ministerial Conference which meets at least once every two years. The Fifth WTO Ministerial Conference was held in Cancún, Mexico from 10 to 14 September 2003. Below this is theGeneral Council (normally ambassadors and heads of delegation in Geneva, but sometimes officials sent from members' capitals) which meets several times a year in the Geneva headquarters. The General Council also meets as the Trade Policy Review Body and the Dispute Settlement Body. At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS) Council report to the General Council. Numerous specialized committees, working groups and working parties deal with the individual agreements and other areas such as the environment, development, membership applications and regional trade agreements. The WTO has nearly 148 members, accounting for over 97% of world trade; there are many other countries who are planning to become the members.
How Does the Agreements affect the Member Countries? The World Trade organization was established with an objective of enhancing the free and fair trade, improve growth rate of world trade by encouraging members to reduce trade barriers and to increase the overall prosperity in the global economies. As given in the official document of WTO following are the ten ways in which the organization affects the world Trade and its member countries. 1. 2. 3. 4. The system helps promote peace Disputes are handled constructively Rules make life easier for all Freer trade cuts the costs of living
5. It provides more choice of products and qualities 6. Trade raises incomes 7. Trade stimulates economic growth 8. The basic principles make life more efficient 9. Governments are shielded from lobbying 10. The system encourages good government However, there are several groups that are against this multi-lateral organization, and they continuously propagate against the agreements considering them as being dis-advantageous to the developing countries and several other sectors in the economy. Following are some of the general aspects of disagreements on the principles and existence of WTO. 1. The WTO dictates policy 2. The WTO is for free trade at any cost 3. Commercial interests take priority over development … 4. It takes over the environment aspects to give concessions to some countries for raising barriers. 5. Some issues which are continuously raised in the ministerial for discussions but never discussed are over health and safety 6. The WTO destroys jobs, worsens poverty 7. Small countries are powerless in the WTO 8. The WTO is the tool of powerful lobbies 9. Weaker countries are forced to join the WTO 10. The WTO is undemocratic How Does it Affect India? India is a founder member of World Trade Organization, and also treated as the part of developing countries group for accessing the concessions granted by the organization. As a result, there are several implications for India for the various agreements that are signed under WTO. Let us understand each agreement in general, what it means and its implications for India in specific. 1. India was a signatory of the General Agreement on Tariffs & Trade (GATT), and as a part of the commitment had to change several laws and policies; the major changes that were incorporated were as a follows ? Reduction of peak and average tariffs on manufactured products ? Commitments to phase out the quantitative restrictions over a period as these were considered non-transparent measure in any countries policy structure. The result of this agreement as mentioned earlier was limited as, GATT was only an agreement and there was no enforcing agency to strictly implement the clauses and punish the country which breaks the clauses. Thus the impact was partial. However, with WTO coming into effect, the competition from imports for the domestic firms has increased. WTO had the deadline till 2005, for the domestic policy was supposed to phase out the QR's; for those countries which face severe balance of payments problems special concession period was given. Thus it is very clear that only those firms that have competitive advantage would be able to survive in the long run, and those firms which are weak would fade into history in the process. 2. Trade Related Investment Measures (TRIMS) The agreement relates to investments originating from one country to another. The agreement prohibits the host country to discriminate the investment from abroad with domestic investment, which implies that it favours national treatment of foreign investment. Besides this, there are several other clauses of the agreement totaling to 5 in this segment, one agreement requires investment to be freely allowed
within domestic borders without any maximum cap on it. Another restricts to impose any kind of export obligation or import cap on the investment. Another requires that there should not be any domestic content requirement on foreign firms operating and manufacturing in other countries. These agreements have a direct impact on our Trade, Investment and foreign exchange policy, domestic annual budgetary proposals and also on the industrial policy. Implementation process for the above requires proper preparation by the industries and policy makers, as sudden change may result in loss of revenue and decline of foreign exchange for the government and economy, and it may result in decline of market share and profitability of businesses, decline in employment opportunities and over all decline in growth. 3. Trade Related Intellectual Property Rights (TRIPS) An intellectual property right refers to any creation of human mind which gets legal recognition and protection such that the creator of the intangible is protected from illegal use of his creation. This agreement includes several categories of property such as Patents, Copyrights, Trademarks, Geographical indications, Designs, Industrial circuits and Trade secrets. Since the law for these intangibles vastly varied between countries, goods and services traded between countries which incorporated these intangibles faced severe risk of infringement. Therefore the agreement stipulated some basic uniformity of law among all trading partners. This required suitable amendment in the domestic IPR laws of each country. Since this process is not a simple one, a time period of 10 years was given to the developing countries. As a result, in India there was a requirement to change the patents act, Trade and merchandise mark act and the copyright right act. Besides these main laws, other related laws also required changes. The main impact of this is on industries such as pharma and bio-technology, because now with the law in place, it is not possible to reverse engineer the existing drugs and formulas, change the process and produce the same product. Now new investment in fresh research is required. This is quite a burden for small industries and there is a possibility that they are thrown out of business due to competition. Besides these, the technology transfer from abroad is expected to become costly and difficult. Strict implementation of law is very important in India, otherwise there could be disastrous affect on the revenue of industries which invest millions of rupees in Research and development if their products get infringed. 4. Agreement on Agriculture (AOA): The Agriculture happens to be one of the most protected sectors in all the countries without any exceptions, and therefore an agreement on the agricultural issues have always been evading and debated strongly by all the countries involved in trade in agriculture. The agreement on agreement deals with market access, Export subsidies and government subsidies. Broadly, as of now the requirement is to open up the markets in specific products in market access and incase of subsidies, it is to go for tarrification and phase it out eventually or reduce it to bound limits. The immediate impact of the agreement would be on the policy makers to scrutinize all the items under subsidy, QRs and tariffs. However, the calculation of AMS reveals that the subsidy given to Indian farmers are much below the acceptable levels and therefore need not be changed. Looking from other perspective, the reduction of tariffs and subsidy in export and import items would open up competition and give a better access to Indian products abroad. However, the concern is on the competitiveness and sustainability that the Indian farmer would be able to prove in the long run once the markets open up. Thus there is a requirement to change policy support to meet the changing needs of Indian agriculture
to gear it up for future. 5. Agreement on Sanitary and psyto-sanitary measures (SPM): this agreement refers to restricting exports of a country if they do not comply with the international standards of germs/bacteria etc… if the country suspects that allowing of such products inside the country would result in spread of disease and pest, then there is every right given to the authorities to block the imports. Indian standards in this area are already mentioned and therefore there is no need to change the law, but the problem is that of strictly implementing the laws. There is an urgent need to educate the exporters regarding the changing scenario and standards at the international arena, and look at the possible consequence and losses to be incurred if the stipulations are not followed. Therefore, to meet the standards certain operational changes are required in the industries such as food processing, marine food and other packed food that is being currently exported from India. 6. Multi-Fiber Agreement (MFA): This agreement is dismantled with effect from 1 January 2005. The result was removal of QR on the textile imports in several European countries. As a consequence a huge textile market is opened up for developing countries textile industry as well as for other countries that have competitive advantage in this area. The immediate impact is on the garment and textile manufacturers and exporters. However, it still needs to be seen whether the industry is able and ready to take advantage of the large markets. This requires quite an amount of modernization, standardization, cost efficiency, and customization and frequent up gradation of designs to meet the changing need of global customers. The dismantling of QR also mean more competition to Indian textile exporters and therefore, it becomes imperative to enhance the competitiveness in niche areas. Besides these major agreements there are several other agreements such as agreement on Market Access , which propagates free market access to products and reduction of tariff and non-tariff barriers; agreement to have Safeguard Measures if there is an import surge and it is liable to affect the domestic industries in the transition economies. These measures can include imposing QR for a certain period and also imposing tariffs on the concerned products. There are other agreements that call for direct reduction of S ubsidies on Exports, which are not permissible, and phasing it out over a period of time. Besides these there are other Counter-Veiling Duties (CVD) that are permitted to be used in certain conditions. These are supposed to have an impact positive if they help the industries and negative if they reduce the cost competitiveness. The trading countries are allowed to impose an Anti-Dumping Duty (ADD) against imported products if the charge of Dumping is claimed against them. The requirement is to prove that the product is being sold at a price, which results in material injury to the domestic industries. There are several cases in which the duty is imposed but it still remains to be proven by the Dispute settlement tribunal in case the other trading party opposes the duty imposed as "unfair". However, the proposal always should come from the representatives of the industries affected; this may result in a problem, as small industries voice may remain unheard in the process. Certain Other Unresolved Issues: There are several clauses in each of the above agreements; where there has been no consensus arrived. Besides that there are several other cases where there is no consensus on the entire agreement itself, which means that these are still in their conceptual and drafting stages. Some of such agreements are on Labour Standards and core social clauses, which intend to impose a labour standard and certain norm against exploitation of labour by the organization where they work. Such standards are likely to result in banning of certain items exports to developed world causing severe damage to industries such as Carpet manufacturing, crackers, leather, handicrafts and sports goods. There is another agreement, which is still under discussion by member countries; this is on Trade and
Environment. Some countries wish to impose restrictions on trade on environmental grounds. The agreement revolves around protecting global environment by enforcing standards on production and consumption. The ranges of clauses are from production, packaging to transportation of the goods as specified by norms. The main impact of this clause would be on industries such as seafood, food processing and drugs and chemical manufacturing. There would also be a overall impact on the export business as the rules related to packaging would be very stringent. Another agreement where the consensus is yet to be reached is on Trade and Investment. The main objective of this agreement is to enable a free operating environment for foreign investment in host countries such that there is minimum interference and equal rights. There would be a direct impact on the foreign investment policy and trade policy of the government with a long-term impact on balance of payment and foreign exchange position of the country. This agreement would affect almost all industries and services without an exception. However the specific impact is expected on auto components and small retailers. Trade and Competition is another agreement on which the discussions are going on to reach a consensus. The main aim of this is to stop the business practices that distort competition in any way and to curb monopolistic growth in trade. The agreement would have an impact on the MRTP act, which needs to be replaced by the new competition law, the process for which has already started. These changes would result in a more competitive environment and it would also be a deterrent for big business houses if they wish to expand further in the same area. Thus, the formation of cartels and mergers and acquisitions would be restricted to a great extent. Transparency in Procurements made by the Government is one such clause where it is being debated to a large extent. This is particularly of concern to developing countries as the role played by the government in a countries development is much higher than what it is in other developed countries. This would have a serious impact on the way the government and other public sector units approach the domestic procurement. This would imply that no special preference would be given to the domestic suppliers and they also need to compete on a price basis for getting orders from domestic government. This clearly can mean that many government suppliers may lose out in competition with efficient and low cost foreign suppliers. Major Conclusions The Indian economy has experienced a major transformation during the decade of the 1990s. Apart from the impact of various unilateral economic reforms undertaken since 1991, the economy also had to reorient itself to the changing multilateral trade discipline within the newly written GATT/WTO framework. The unilateral trade policy measures have encompassed exchange-rate policy, foreign investment, external borrowing, import licensing, custom tariffs, and export subsidies. The multilateral aspect of India's WTO commitments is regarding trade in goods and services, trade-related investment measures, and intellectual property rights. After analyzes of the economic effects on India and other major trading countries/regions of the Uruguay Round (UR) trade liberalization and the liberalization that might be undertaken in a new WTO negotiating round. India's welfare gain is expected to be 1.1% ($4.7 billion over its 2005 GDP) when the UR scenarios get fully implemented. The additional welfare gain is an estimated 2.7% ($11.4 billion) when the assumed future WTO round of multilateral trade liberalization is achieved. It is expected that Resources would be allocated in India to the labor-intensive sectors such as textiles, clothing, leather and leather products, and food, beverages, and tobacco. These sectors would also experience growth in output and exports. Real returns to both labor and capital would increase in the economy. However as mentioned above in the analysis of each agreement there is a serious and urgent need to re-look the strategies followed by individual firms in the changing context of increasing competition and opened markets. As said time and again there is no reversal of agreements, so what is
required is to make internal policy changes at macro, meso and micro level to suit the changed external environment.
Abstract: One of the most dramatic events that have taken place in later part of 20th century was culmination of GATT 1947 into WTO (The world Trade organization), which came into being on 1st January 2005. This WTO has set expectations high in various member countries (by now 149 including latest addition of Saudi Arabia) regarding spurt in world trade where India has insignificant share in the pie-Only 0.75% at the most. Even in IT exports the share of Indian exporters is just peanuts in view of overall world market. Since formation of WTO there have been regular meetings of Ministerial Conferences (Highest Policy level body of WTO) religiously every 2 years and 5 such meetings have taken place while world prepares for the Hong Kong meeting to take place shortly, the sixth one. While 5th meet at Cancun, Mexico was more or less failure, the earlier one at Seattle, USA was received with brickbats from environmentalist and Labor union Groups protesting against WTO regime. It is statistical fact that world trade has definitely grown since 1995 thereby giving indicators that international trade reforms do play important role in boosting economic development of various countries. Problems facing India in WTO & its Implementation: But there are several problems facing these Multilateral Trade agreements: - Predominance of developed nations in negotiations extracting more benefits from developing and least developed countries - Resource and skill limitations of smaller countries to understand and negotiate under rules of various agreements under WTO - Incompatibility of developed and developing countries resource sizes thereby causing distortions in implementing various decisions - Questionable effectiveness in implementation of agreements reached in past and sincerity - Non-tariff barriers being created by developed nations. - Regional cooperation groups posing threat to utility of WTO agreement itself, which is multilateral encompassing all member countries - Poor implementation of Doha Development Agenda - Agriculture seems to be bone of contention for all types of countries where France, Japan and some countries are just not willing to budge downwards in matter of domestic support and export assistance to farmers and exporters of agriculture produce. - Dismantling of MFA (Multi Fiber Agreement) and its likely impact on countries like India - Under TRIPS question of high cost of Technology transfer, Bio Diversity protection, protection of Traditional Knowledge and Folk arts, protection of Bio Diversities and geographical Indications of origin, for example Basmati, Mysore Dosa or Champagne. The protection has been given so far in wines and spirits that suit US and European countries. Implications for India It appears that India does not stand to gain much by shouting for agriculture reforms in developed countries because the overall tariff is lower in those countries. India will have to tart major reforms in agriculture sector in India to make Agriculture globally competitive. Same way it
is questionable if India will be major beneficiary in dismantling of quotas, which were available under MFA for market access in US and some EU countries. It is likely that China, Germany, North African countries, Mexico and such others may reap benefit in textiles and Clothing areas unless India embarks upon major reforms in modernization and up gradation of textile sector including apparels. Some of Singapore issues are also important like Government procure, Trade and Investment, Trade facilitation and market access mechanism. In Pharma-sector there is need for major investments in R &D and mergers and restructuring of companies to make them world class to take advantage. India has already amended patent Act and both product and Process are now patented in India. However, the large number of patents going off in USA recently, gives the Indian Drug companies windfall opportunities, if tapped intelligently. Some companies in India have organized themselves for this. Excerpts from Speech of Ramkrishna Hegde, the then Minister, at Geneva in 1998"In order to make WTO an effective multilateral body, which serves the objectives for which it was set up, it is necessary to go back to the basic principles. The Uruguay Round negotiators had stated their intentions quite clearly in the Preamble to the Marrakesh Agreement establishing the WTO. They recognised "that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development. They recognized also "that there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development". The Objective of WTO Reiterated: It is very clear that the intention of the negotiators was to use trade as an instrument for development, to raise standards of living, expand production, keeping in view, particularly, the needs of developing countries and least-developed countries. The WTO must never lose sight of this basic principle. Every act of implementation and of negotiation, every legal decision, has to be viewed in this context. Trade, as an instrument for development, should be the cornerstone of all our deliberations, decisions and actions. Besides, the system should be seen to be equitable and fair. It must be used in such a manner that the letter and spirit of the Agreements is fully observed. The WTO Members must mutually support and encourage each other to achieve the final goal. It must be recognized that all Members should assume a negotiating rather than an adversarial posture. It should also be recognized that different economies have different features and structures, different problems, different cultures. The pace of change must be carefully calibrated to take into account such differences. All Members should guard against unilateral action that cuts at the root of multilateral agreement and consensus. Developing countries have generally been apprehensive in particular about the implementation of special and differential treatment provisions (S&D) in various Uruguay Round Agreements. Full benefits of these provisions have not accrued to the developing countries, as clear guidelines have not been laid down on how these are to be implemented. " The first Ministerial Conference held in 1996 in Singapore saw the commencement of pressures toenlarge the agenda of WTO. Pressures were generated to introduce new Agreements on Investment, Competition Policy, Transparency in Government Procurement and Trade Facilitation. The concept ofCore Labor Standards was also taken up for introduction. India and the developing countries, which were already under the burden of fulfilling the commitments undertaken through the Uruguay Round Agreements, and who also perceived many of the new issues to be non-trade issues, resisted the introduction of these new subjects into
WTO. They were partly successful. The Singapore Ministerial Conference (SMC) set up open-ended Work Program to study the relationship between Trade and Investment; Trade and Competition Policy; to conduct a study on Transparency in Government Procurement practices; and do analytical work on simplification of trade procedures (Trade Facilitation). Most importantly the SMC clearly declared on the Trade-Labor linkage as follows: " We reject the use of labor standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question. In this regard we note that the WTO and ILO Secretariat will continue their existing collaboration". Not many people in this country are aware that there is a dispute settlement system in the WTO. This is at the heart of the WTO and sets it apart from the earlier GATT. Countries like the USA and the European Union have brought cases against us and won these cases like in pharmaceutical patents. India too has complained against the US and Europe and it too has won its fair share of disputes in areas like textiles. India must effectively use this mechanism to extract fair share in world markets. It would be advantageous for India to give concrete shape to SAARC economic forum or Free market and align itself with ASEAN. What India should do? The most important things for India to address are speed up internal reforms in building up worldclass infrastructure like roads, ports and electricity supply. India should also focus on original knowledge generation in important fields like Pharmaceutical molecules, textiles, IT high end products, processed food, installation of cold chain and agricultural logistics to tap opportunities of globalization under WTO regime. India's ranking in recent Global Competitiveness report is not very encouraging due to infrastructure problems, poor governance, poor legal system and poor market access provided by India. Our tariffs are still high compared to Developed countries and there will be pressure to reduce them further and faster. India has solid strength, at least for mid term (5-7 years) in services sector primarily in IT sector, which should be tapped and further strengthened. India would do well to reorganize its Protective Agricultural policy in name of rural poverty and Food security and try to capitalize on globalization of agriculture markets. It should rather focus on Textile industry modernization and developing international Marketing muscle and expertise, developing of Brand India image, use its traditional arts and designs intelligently to give competitive edge, capitalize on drug sector opportunities, and develop selective engineering sector industries like automobiles & forgings & castings, processed foods industry and the high end outsourcing services. India must improve legal and administrative infrastructure, improve trade facilitation through cutting down bureaucracy and delays and further ease its financial markets. India has to downsize non-plan expenditure in Subsidies (which are highly ineffective and wrongly applied) and Government salaries and perquisites like pensions and administrative expenditures. Corruption will also have to be checked by bringing in fast remedial public grievance system, legal system and information dissemination by using e-governance. The petroleum sector has to be boosted to tap crude oil and gas resources within Indian boundaries and entering into multinational contracts to source oil reserves. It wont be a bad idea if Indian textile and garment Industry go multinational setting their foot in western Europe, North Africa, Mexico and other such strategically located areas for large US and European markets.
The performance of India in attracting major FDI has also been poor and certainly needs boost up, if India has to develop globally competitive infrastructure and facilities in its sectors of interest for world trade.
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Short answers:
What Is International Trade? International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, orsupply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes.
New Trade Theory :New Trade Theory tries to explain empirical elements of trade that comparative advantage-based models above have difficulty with. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production (i.e. foreign direct investment) that exists. New Trade theories are often based on assumptions such as monopolistic competition and increasing returns to scale. One result of these theories is the home-market effect, which asserts that, if an industry tends to cluster in one location because of returns to scale and if that industry faces high transportation costs, the industry will be located in the country with most of its demand, in order to minimize cost
Absolute cost advantage theory :A country has an absolute advantage over another in producing a good, if it can produce that good using fewer resources than another country. For example if one unit of labor in India can produce 80 units of wool or 20 units of wine; while in Spain one unit of labor makes 50 units of wool or 75 units of wine, then India has an absolute advantage in producing wool and Spain has an absolute advantage in producing wine. India can get more wine with its labor by specializing in wool and trading the wool for Spanish wine, while Spain can benefit by trading wine for wool. (Adam Smith, Wealth of Nations, Book IV, Ch.2.) The benefits to nations from trading are the same as to individuals: trade permits specialization, which allows resources to be used more productively.
Differences between BOT and BOP :Basis of Difference Balance of Trade (BOT) Balance of Payment (BOP) Balance of payment is flow of cash between domestic country and all other foreign countries. It includes not only import and export of goods and services but also includes financial capital transfer.
1. Definition
Balance of trade may be defined as difference between export and import of goods and services.
2. Formula
BOT = Net Earning on Export - Net payment for imports
BOP = BOT + (Net Earning on foreign investment - payment made to foreign investors) + Cash Transfer + Capital Account +or Balancing Item or BOP = Current Account + Capital Account + or - Balancing item ( Errors and omissions) Balance of Payment will be favourable, if you have surplus in current account for paying your all past loans in your capital account. Balance of payment will be unfavourable, if you have current account deficit and you took more loan from foreigners. After this, you have to pay high interest on extra loan and this will make your BOP unfavourable. To stop taking of loan from foreign countries.
3. Favourable or Unfavourable
If export is more than import, at that time, BOT will be favourable. If import is more than export, at that time, BOT will be unfavourable.
4. Solution of Unfavourable Problem
To Buy goods and services from domestic country. Following are main factors which affect BOT a) cost of production b) availability of raw materials c) Exchange rate d) Prices of goods manufactured at home If you see RBI' Overall balance of payment report, it shows debit and credit of current account. Credit means total export of different goods and services and debit means total import of goods and services in current account.
5. Factors
Following are main factors which affect BOP a) Conditions of foreign lenders. b) Economic policy of Govt. c) all the factors of BOT
6. Meaning of Debit and Credit
Credit means to receipt and earning both current and capital account and debit means total outflow of cash both current and capital account and difference between debit and credit will be net balance of payment.
What is Foreign Exchange? Foreign exchange consists of trading one type of currency for another. Unlike other financial markets, the FX market has no physical location and no central exchange. It operates "over the counter" through a global network of banks, corporations and individuals trading one currency for another. The FX market is the world's largest financial market, operating 24 hours a day with enormous amounts of money traded on a daily basis. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, political and social events at the time they occur, without having to wait for exchanges to open. Access to modern news services, charting services, 24- hour dealing desks and sophisticated online electronic trading platforms has seen speculation in the FX market explode, particularly for the individual trader. The currency markets are not new. They've been around for as long as banks have been doing business. What is relatively new is the accessibility of these markets to the individual speculator, particularly the small- to medium-sized trader.
International liquidity:International liquidity is the part of the concept of international finance. International liquidity is foreign currency or gold in the reserve of any country. It is very useful to pay the amount of imported goods and reduce balance of payment deficit. Every country should increase exports for reducing international liquidity shortage. At micro level, you can understand international liquidity as cash in your pocket for operation of business. If you have building, furniture, plant, equipments and stock but no cash in pocket, you can not survive long term in your business. Just like this, any nation may have lots of natural resources in the form of land, mines and forest but for dealing with foreign country, that nation should have foreign currency in hand.
Objectives of WTO:1.To ensure the reduction of tariffs and other barriers to trade. 2.To eliminate discriminatory treatment in international trade relations. 3.To facilitate higher standards of living, full employment, a growing volume of real income and effective demand and an increase in production and trade in good and services of the member nations. 4.To make positive effect, which insures developing countries especially the least developed secure level of share in the growth of international trade that reflects the needs of their economic development. 5.To facilitates the optimal use of the world’s resources for sustainable development. 6.To promote an integrated, more visible and durable trading system incorporating all the resolutions of the Uruguay Round’s Multi literal trade negotiations.
TRIPs:1) The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) is an international agreement administered by the World Trade Organization (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation. It was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994.
IBRD and its Functions:The International Bank for Reconstruction and Development (IBRD) is one of five institutions that comprise the World Bank Group. The IBRD is an international organization whose original mission was to finance the reconstruction of nations devastated by World War II. Now, its mission has expanded to fight poverty by means of financing states. Its operation is maintained through payments as regulated by member states. It came into existence on December 27, 1945 following international ratification of the agreements reached at the United Nations Monetary and Financial Conference of July 1 to July 22, 1944 in Bretton Woods, New Hampshire. The IBRD provides loans to governments, and public enterprises, always with a government (or “sovereign”) guarantee of repayment subject to general conditions. The funds for this lending come primarily from the issuing of World Bank bonds on the global capital markets—typically $12–15 billion per year. These bonds are rated AAA (the highest possible) because they are backed by member states’ share capital, as well as by borrowers’ sovereign guarantees. (In addition, loans that are repaid are recycled, or relent.) Because of the IBRD’s credit rating, it is able to borrow at relatively low interest rates. As most developing countries have considerably lower credit ratings, the IBRD can lend to countries at interest rates that are usually quite attractive to them, even after adding a small margin (about 1%) to cover administrative overheads.
What are the Main Types of Disequilibrium in BOP ?
? ? ? ?
Cyclical Disequilibrium. Secular Disequilibrium. Structural Disequilibrium. Fundamental Disequilibrium.
5 marks:Advantages and disadvantages of international trade:Advantages:1.International division of labour: It makes international division of labour possible. It is universally accepted from the days of Adam Smith that division of labour is advantageous. Different countries can specialise in the production of goods for which they are best equipped only when there exists free international trade. Specialisation and division of labour bring with them a number of advantages such as increase in efficiency and skill and attainment of goods at the lowest possible costs. This certainly adds to the total welfare of the world in general and to the welfare of the participating countries in particular. 2.Facility to the consumers: International trade provides to the consumers the facility of buying their requirements in the market with the lowest prices and with the best quality of the goods. This advantage fall equally on the consumers of all the countries participating in international trade and, therefore, raises the standard of living and total welfare of the people living in all those countries. Besides, some commodities which are almost impossible to be produced at home can be obtained from outside through international trade. For instance, an Englishman, in absence of free international trade, could not have tasted Indian tea, Danish butter, Australian beaf and Brazilian coffee.
3.Economic stability: The economy of a country is subject to “Volatile fluctuations. In an agriculture economy, nature plays tricks with a rhythmic periodicity. In such circumstances, when the country’s economy faces serious set-back in production due to one or other reasons, the population living in the country can readily starve in absence of international trade. It is simply on account of international trade that famines are avoided through deficits of food in some countries being made up from contemporary surplus in other countries. Thus, international trade helps the nations at the time of economic calamities as such calamities are not likely to occur in all the countries simultaneously. 4.Equalisation of prices: Free international trade tends to equalise the prices of goods and services throughout the whole world. The consumption pattern and standards of living tend to be equal in all the countries. What advantage such an equality brings is rather a controversial point yet in this age of ‘Equality, Fraternity and Democracy’ such an equalization would have been advantageous from economic as well as political point of view. 5.Uniform Competition: Where there exists free international trade, the competition prevails all over the world. This makes the home industries to fear of their foreign counterpart. Only the efficient units can survive. Of course, economically speaking only efficient production units must survive. What is the sense in wasting material in inefficient units? In the presence of international trade and hence, competition the less efficient units also try to improve their efficiency so as to be able to face the competition. This certainly increases the overall efficiency of a nation. 6.International understanding: International trade helps in establishing mutual contract between nations. They comd to understand each other. Sometimes, beginning from trades, the nations give up the idea that cash- payment is the sole nexus and start having good relation among themselves. This may help in the establishment of international peace and solidarity. Thus, international trade is considered a very strong guarantee for the maintenance of world peace.
Disadvantages:In the presence of these high sounding and ideal advantages of the international trade there would have been no opposition to free international trade. But unfortunately this is not the case. People do not enter into the foreign trade as freely as they can and not even sacrifice some of their economic interests such as lower costs and lower prices and abstain from international trade. Even in the matters of simple trade between nations every party is ever cautious of the minutest details of the transaction. All this is due to the fact that besides great advantages there are certain disadvantages from the foreign trade and this is why free trade between countries had not been always practical. Though the doctrine of comparative advantage rightly points out the advantages of the trade between countries, yet it is not always on the basis of this that the nations are guided in the matters of trade between themselves. Broadly speaking, the following are the disadvantages which may come into existence in international trade. 1.Undesirable Utilization of resources: There are certain resources such as coal, mica, iron, etc., which are being sent out in the international trade and thus the reserves of these resources which could have been sufficient for the country itself for a long time, might exhaust in a very short period. 2.Dangers to the growing industry: International trade threatens the existence of growing industry of the country in the face of grim competition. 3.Problem of self-sufficiency: By international scale the country’s development is possible only in one direction, i.e., only in the matters of specialised commodities. This tendency presents a great problem of self-sufficiency in times of war and emergency. Suppose the country providing food becomes an enemy of the country that does not produce food, the latter is doomed to starvation.
4.Non-utilisationof resources: There are certain resources in a country which remain unused due to the fact that the commodities which can be produced by their use can be had from abroad at a lower price that at which it is possible to produce them at home.
What are the Main Types of Disequilibrium in Balance of Payments?
The main types of disequilibrium in the balance of payments are as given below: 1. Cyclical Disequilibrium: Cyclical disequilibrium in the balance of payments arises due to business cycles. It is caused (a) by cyclical patterns of income, or (b) by different income elasticity's, or (c) by different price elasticity's. These factors bring changes in the terms of trade as well as growth of trade which, in turn, lead to a deficit or surplus in the balance of payments. When prices rise in prosperity, a country with more elastic demand for imports will experience a decline in the value of imports, thus leading to a surplus in the balance of payments. Conversely, as prices decline in depression, more elastic demand will increase imports and cause a deficit in the balance of payments. These tendencies may, however, be offset by the effects of income changes. High incomes during prosperity increase imports and low incomes during depression reduce imports. 2. Secular Disequilibrium: Secular or long-term disequilibrium in balance of payments occurs because of long-seated and deep-rooted changes in the economy as it moves from one stage of growth to another, (a) In the initial stages of economic development, domestic investment exceeds savings and imports exceed exports. Disequilibrium occurs due to lack of funds to finance the import surplus, (b) Then comes a stage when domestic savings tend to exceed domestic investment and exports exceed imports. Disequilibrium arises because the surplus savings exceed investment opportunities abroad, (c) At a still later stage, domestic savings tend to equal domestic investment and long-term capital movements on balance become zero. 3. Structural Disequilibrium: Structural disequilibrium in the balance of payments occurs when structural changes in some sectors of the economy alter the demand and supply forces influencing exports and imports. According to Kindleberger, structural disequilibrium may be of two types:
(i) "Structural disequilibrium at the goods level occurs when a change in demand or supply of exports or imports alters a previously existing equilibrium or when a change occurs in the basic circumstances under which income is earned or spent abroad, in both cases without the requisite parallel changes elsewhere in the economy." (ii) "Structural disequilibrium at the factor level results from factors which fail to reflect accurately factor endowments i.e., when factor prices, out of line with factor endowments, distort the structure of production from the allocation of resources which appropriate factor prices would have indicated." Structural disequilibrium is caused by changes in technology, tastes and attitude towards foreign investment. Political disturbances, strikes, lockouts, etc., which affect the supply of exports, also cause structural disequilibrium. 4. Fundamental Disequilibrium: The term fundamental disequilibrium has been originally used by the I.M.F., to indicate a persistent and long-term disequilibrium in a country's balance of payments. Fundamental disequilibrium is generally caused by dynamic factors and particularly leads to chronic deficit in the balance. The main causes of fundamental disequilibrium are: (a) excessive or inadequate internal demand for foreign goods; (b) excessive or inadequate competitive strength in the world market; (c) excessive capital movements.
Differences Between Internal And International Trade:There are certain special features, which differentiate internal trade from international trade. They are explained as following manner:
•Demand and Supply: Demand and supply cannot work out their full effects where foreign trade is concerned. Where as
such factors can work out their full efforts in the case of internal trade.
•Artificial Barriers to Trade: The natural difficulties may be increased by artificial barriers to trade, either through prohibitive
laws as in war time of through customs duties or protective tariffs in the context of international trade.
•Differences in Economic Environment from country to country: Different countries have different facilities in carrying out
their productive activities. Differences in system of national and local taxation, regulations for health, sanitation, factory organisation, education and insurance, policy regarding the transport and public utilities, laws relating to industrial combinations and trade, etc., do exist as between countries. These differences bring about a difference in the costs of production between them.
•Currency differences are still more important because of the fact that exchange is thereby hampered. For instance, if an
Indian manufacturer wishes to sell goods in the U.S.A or English, he must know the value of the U.S.A or England currency units in terms of Indian money. Apart form this, each country is under the control of a separate central bank, each following a separate monetary policy which may greatly affect the foreign trade of the country.
•The geographical and climatic conditions may give rise to territorial division of labour and localization of industries. Some
countries may have natural resources is abundance such as iron ore, coal, etc., whereas in some other countries climatic conditions give advantages to them.
•Long-distance: International trade is predominantly long-distance. This may affect the transport costs and the mobility of
the different factors of production.
•Preference: Preference for home and the prejudice against foreigners remain as one of the major factors that would explain
as to why the rates of earning of the different of equal efficiency would not be equalized between different countries.
What Is an Exchange Rate?
An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is the value of another country's currency compared to that of your own. If you are traveling to another country, you need to "buy" the local currency. Just like the price of any asset, the exchange rate is the price at which you can buy that currency. If you are traveling to Egypt, for example, and the exchange rate for U.S. dollars is 1:5.5 Egyptian pounds, this means that for every U.S. dollar, you can buy five and a half Egyptian pounds. Theoretically, identical assets should sell at the same price in different countries, because the exchange rate must maintain the inherent value of one currency against the other.
Fixed Exchange Rates:There are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged. If, for example, it is determined that the value of a single unit of local currency is equal to US$3, the central bank will have to ensure that it can supply the market with those dollars. In order to maintain the rate, the central bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the central bank that it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation/deflation) and ultimately, the exchange rate. The central bank can also adjust the official exchange rate when necessary.
Floating Exchange Rates:Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting," as any differences in supply and demand will automatically be corrected in the market. Look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and stimulating demand for local goods and services. This in turn will generate more jobs, causing an auto-correction in the market. A floating exchange rate is constantly changing. In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can also influence changes in the exchange rate. Sometimes, when a local currency reflects its true value against its pegged
currency, a "black market” (which is more reflective of actual supply and demand) may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market. In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation. However, it is less often that the central bank of a floating regime will interfere.
Flexible Exchange Rates:A final reservation concerning flexible exchange rates is of prime importance. This kind of argument is that internal and external economic matters are so inextricably entwined, that even flexible exchange rates will not insulate the domestic economy from happenings abroad over which no single nation has control.
The argument underscores the need under any financial arrangement for international cooperation.
When international movements of capital flow freely changes in the domestic level of interest rates relative to those abroad affect the volume and direction of capital flows.
Most capital movements also affect the supply or demand of foreign exchange and therefore the level of the exchange rate which in turn affects the current account balance.
Consider country 'A' in 'internal balance' with full employment and reasonable price stability. If interest rates abroad rise, capital outflows from country A to foreigners will increase.
This causes a depreciation in country A's currency. The depreciation in turn causes an increase in net exports, thereby raising demand in country A and inducing inflation.
The country's monetary policy must react to the exchange rate movement to stop the inflation.
In other words, the domestic policy of country A is not independent or isolated, but must be coordinated in a very basic sense with policies abroad over which A has no voice or control.
Opponents of flexible exchange rates generally use one or more of the arguments to show that flexible exchange rates will be unstable exchange rates.
Indeed, flexible exchange rates can be unstable rates, since the demand and supply of foreign exchange depend on among other factors.
Relative international prices, relative rates of growth in national incomes, and international interest rates differentials--- a prolonged movement of one or more of these variables for a country which is out of step with the rest of the world will introduce prolonged one-way movements in the demand or supply of foreign exchange and of the exchange rate.
Once it is clear that the movement in the exchange rate will be in one direction only, private speculators will line up on one side of the market only.
Moreover, this forces a more rapid and destabilizing movement in the rate which can only be stopped by massive contraspeculation by the country's monetary authorities and by fundamental changes in domestic policies.
But the advantage of flexible rates lies in meeting once-and-for-all changes in international relationships.
To cope with a bout of inflation which is eventually stopped in the country of origin, a flexible exchange rate will realign international price relationships without a deflation of equal magnitude to bring the foreign balance back into equilibrium.
It appears then, that so long as a country's prices, growth rate, and interest rates do not get flagrantly out of line with those of its trading partners, a flexible exchange rate will be a basically stable one, and will ease the adjustment to once-over changes with economic conditions abroad.
But coordination of policies with those abroad is a necessary factor in keeping the exchange rate stable.
Essay on the Achievements of International Monetary Fund:Undoubtedly the IMF has made a remarkable success in achieving most of its principal objectives: 1. The primary goal of the IMF was to promote stability in exchange rates. The measure of exchange stability that the world has witnessed in the IMF era is remarkably superior to what was seen during the inter-war period or gold standard regime. Under IMF arrangements, stable exchange rates do not imply rigid exchange rates. IMF's object is to combine the merits of stability with flexibility in exchange management. It is aimed at avoiding competitive exchange depreciations by requiring members to declare the par values of their currencies fixed in terms of gold or the U.S. dollar. However, it permitted an orderly adjustment of exchange rates when this was needed for correcting fundamental disequilibrium in a country's balance of payments. The recent devaluation of the Indian rupee (in 1966) and that of pound-sterling were justified by the IMF. 2. The IMF also served as an expert institution for consultation and guidance in international monetary matters. It serves as an excellent forum for discussions, practically on a day-to-day basis, of the economic, fiscal and financial policies of member nations, with particular reference to their balance of payments impact. The Fund has created a feeling among the member nations that, their economic problems are not their exclusive concern but of the whole international society. 3. The Fund has contributed in certain ways to the expansion of world trade. By providing credit facilities to member countries, the IMF has reduced the need for their imposing import quotas and resorting to exchange controls. It assists the deficit countries in meeting their temporary disequilibrium in the balance of payments. It also "works for facilitating multi-lateral payments and trade, promoting thereby, international trade as a whole.
4. In recent years the Fund has achieved some success in bringing about a simplification of the multiple exchange system at least in countries that have sought financial assistance from the Fund. 5. The Fund has been instrumental in ensuring steady progress in the establishment of a multilateral system of payments in respect of current transactions. However, little success has been achieved in this direction due to agencies and organisations out of the Fund's purview. 6. In the beginning, the Fund pursued a conservative credit policy, refusing loans for any purpose other than correcting a fundamental disequilibrium in the balance of payments. Moreover, the IMF credit was of short-term duration only. Lately, however, the Fund has changed its attitude by accepting a more liberal credit policy. Today, the Fund grants development loans, too. Hence, the quantum of borrowings from the Fund has shown a marked increase in recent years. 7. In a nutshell, the Fund has thus, been able to secure all the advantages of managed paper standard by maximising employment and accelerating the pace of economic development and of the gold standard by maintaining comparative economic stability, while carefully avoiding the disadvantages of either. 8. Moreover, the Fund has been particularly interested-in the newly developing countries of the world and has been liberally assisting them to maintain a healthy balance of payments and monetary stability at home. In recent years, however, underdeveloped countries have started looking to the Fund to assist them in their economic development programme also. Furthermore, most of the new member countries who have acquired independence recently are facing difficult problems in organising their monetary, fiscal and exchange systems. These countries, thus, require Fund's growing assistance in constructing a solid monetary and exchange base for their economic growth. The Fund has been already providing technical assistance to its members in this respect, but now its activity is substantially widened to meet this challenge. In many of these countries, the Fund's experts have assisted in the formulation of appropriate monetary, fiscal and exchange policies or in the implementation for stabilisation programmes. Besides, the Fund has organised, since 1964, a Fiscal Affairs Department whose officers advise member countries on matters relating to tax policy, tax systems, tax administration, budgeting, etc. The Fund has also organised the Central Banking Advisory Service to provide technical advice to newly developing countries to establish or improve their central banks. An IMF Institute is also started by the Fund in 1964 to train the officials of member nations.
The International Monetary Fund or IMF came into existence in 1945, after the end of World War II and at the beginning of the Cold War. Currently, the IMF has its headquarters in Washington, D.C. and comprises 185 member nations. Considering its growing relevance as an international lender that offers financial and technical aid to its member nations, understanding the IMF is key understanding modern global economics. Reasons for Founding the IMF:In an American town called Bretton Woods in New Hampshire, representatives of 45 western countries, led by the US and UK, and not including the Soviet Union and communist bloc countries, agreed to establish a global economic institution. Of these, 29 countries signed the Articles of Agreement that included the following objectives.,
• Eliminate any disastrous repetitions of the Great Depression.
• Facilitate global financial stability by stabilizing prevailing exchange rates.
•Reduce poverty so that economic growth is triggered.
•Increase international trade and employmen
Main Countries In the IMF:The main member of the IMF is the US, which also enjoys exclusive veto power. Other countries that enjoy voting rights are Japan, Germany, France, China and the UK as its main member. Based on the quota system, the IMF assigns each member country with voting power, subscriptions and special drawing rights (SDRs). Presently there are memberships of 184 countries over the world and a staff of approximately 2,680 from 139 countries. Total Quotas to the extent of $312 billion (as of 8/31/05). Loans outstanding $71 billion to 82 countries, of which $10 billion to 59 on concessional terms (as of 8/31/05) and technical Assistance provided 381 person years during FY2005.Surveillance consultations concluded 129 countries during FY2005, of which 118 voluntarily published information on their consultation. Responsibilities of IMF:Article 1 sets out main responsibilities of IMF which are asfollows, 1) Promotinginternational monetary cooperation.
2) Facilitating the expansion and balanced growth ofinternational trade. 3) Promoting exchange stability. 4) Assisting in the establishment of a multilateral systemof payments and 5) Making its resources available (under adequatesafeguards) to members experiencing balance of payments difficulties.
Generally, the IMF is responsible for ensuring the stabilityof the international monetary and financial system the system of internationalpayments and exchange rates among national currencies that enables trade totake place between countries. The Fund seeks to promote economic stability andprevent crises; to help resolve crises when they do occur; and to promotegrowth and alleviate poverty. It employs three main functions: surveillance technical assistance lending to meet these objectives.
How the IMF Works:The main functions of IMF can be divided into three categories: Surveillance: This involves collaboration between the IMF and its member nations. The IMF continues to assess the economic conditions of its members and offers in-depth advice to help them formulate sound economic policies. Lending: Financial aid is provided to member countries who are struggling with balance of payment problems. Through Exogenous Shocks Facility (ESF) and the Poverty Reduction and Growth Facility (PRGF), the IMF helps its members and even collaborates with the World Bank to lend money to them. Technical Assistance: The IMF offers technical assistance in areas such as banking, fiscal and economic policies as well as exchange rate policies. It also helps its member nations to fight threats such as terrorism and money-laundering.
Achievements and Challenges of the IMF:It would take an entire book to cover all the achievements of the IMF but here are some that are worth recollecting:
•The IMF triggered Poland’s economic transition. The transition included institution building, liberalization, and macro-economic management.
•Initiatives by the IMF initiatives triggered economic growth, liberalized prices and the spread of democratic institutions in countries like the Czech Republic, the Slovak Republic the Baltics and Hungary.
•In 2008, the Asia Pacific region made considerable progress in addressing downside risks to economic growth. Gaining sufficient political muscle to grapple with issues that affect economic prosperity, offering speedy solutions to crises and ensuring economic transition for developing nations are some of the challenges ahead for the IMF. Critics of the IMF say that its policies often make economic crises worse because of the severity of some of the austerity measures it imposes. As the global lender of last resort, sovereign nations will normally try to find any other means they can of solving their own problems before turning to the IMF. Whichever way you look at it, with the growing risks in the global financial system, the Fund is going to be busy in the coming years, and will continue its supporting role to help countries stabilize their commodity and oil prices, pursue expansionary policies and reduce inflation. IMF Activities - Highlights: * The IMF works to promote global growth andeconomic stability and there by prevent economic crisis by encouraging countries to adopt sound economicpolicies. Act ofbeing vigilant is the regular dialogue and policy advice that the IMF offers toeach of its members. Generally once a year, the Fund conducts in-depthappraisals of each member country's economic situation. It discusses with thecountry's authorities the policies that are most conducive to stable exchangerates and a growing and prosperous economy. Members have the option to publishthe Fund's assessment, and the overwhelming majority of countries opt for transparency,making extensive information on bilateral surveillance available to the public.The IMF also combines information from individual consultations to formassessments of global and regional developments and prospects. These views onthe IMF's multilateral surveillance are published twice each year in the worldeconomic outlook and the global financial stability report. Technicalassistance and training are offered - mostly free of charge - to help membercountries strengthen their capacity to design and implement effective policies.Technical assistance is offered in several areas, including fiscal policy,monetary and exchange rate policies, banking and financial system supervisionand regulation, and statistics. * Inthe event that member countries do experience difficulties financing their balance of payments, the IMF is also afund that can be tapped to help in recovery.
Financial stabilityis available to give member countries the breathing room they need to correctbalance of payments problems. A policy program supported by IMF financing isdesigned by the national authorities in close cooperation with the IMF, andcontinued financial support is conditional on effective implementation of thisprogram.
*The IMF is also actively working to reduce poverty in countries around the globe,independently and in collaboration with the World Bank and other organizations. The IMFprovides financial support through its concessional lending facility - thepoverty reduction and growth facility (PRGF) - and through debt relief under theHeavily indebted poor countries (HIPC).
WTO vs GATT: Main Differences:For several decades, the General Agreement on Tariffs and Trade was applied on a provisional basis. It was a multilateral agreement containing rules relating to trade in goods, and although it operated like a permanent agreement, it was without a permanent institutional framework, and was serviced by an ad hoc Secretariat. The WTO now provides a permanent institutional framework for the multilateral trading system, with its own Secretariat. In addition, the WTO not only covers trade in goods, as the GATT rules did, but also trade in services and trade-related aspects of intellectual property rights. Also, the dispute settlement mechanism has been considerably strengthened in the WTO.
3.1 Nature The GATT was a set of rules, with no institutional foundation, applied on a provisional basis. The WTO is a permanent institution with a permanent framework and its own secretariat. 3.2 Scope The GATT rules applied to trade in goods. The WTO Agreement covers trade in goods, trade in services and trade-related aspects of intellectual property rights. 3.3 Approach Whilst the GATT was a multilateral instrument, a series of new agreements were adopted during the Tokyo Round on a plurilateral-that is, selective-basis, causing a fragmentation of the multilateral trading system. The WTO has been adopted, and accepted by its Members, as a single undertaking: the agreements which constitute the WTO are all multilateral, and therefore involve commitments for the entire membership of the organization. 3.4 Dispute settlement
The WTO dispute settlement system has specific time limits and is therefore faster than the GATT system; it operates more automatically, thus ensuring less blockages than in the old GATT; and it has a permanent appellate body to review findings by dispute settlement panels. There are also more detailed rules on the process of the implementation of findings.
What are the Problems or difficulties in international trade:International trade is characterised by the following special problems or difficulties.
1. Distance: Due to long distance between different countries, it is difficult to establish quick and close trade contacts between traders. Buyers and sellers rarely meet one another and personal contact is rarely possible. There is a great time lag between placement of order and receipt of goods from foreign countries. Distance creates higher costs of transportation and greater risks. 2. Different languages: Different languages are spoken and written in different countries. Price lists and catalogues are prepared in foreign languages. Advertisements and correspondence also are to be done in foreign languages. A trader wishing to buy or sell goods abroad must know the foreign language or employ somebody who knows that language. 3. Difficulty in transportation and communication: Dispatch and receipt of goods takes a longer time and involves considerable expenses. During the war and natural calamities, transportation of goods becomes even more difficult. Similarly, the costs of sending or receiving information are very high. 4. Risk in transit: Foreign trade involves much greater risk than home trade. Goods have to be transported over long distances and they are exposed to perils of the sea. Many of these risks can be covered through marine insurance but increases the cost of goods. 5. Lack of information about foreign businessmen:
In the absence of direct and close relationship between buyers and sellers, special steps are necessary to verify the creditworthiness of foreign buyers. It is difficult to obtain reliable information concerning the financial position and business standing of the foreign traders. Therefore, credit risk is high. 6. Import and export restrictions: Every country charges customs duties on imports to protect its home industries. Similarly, tariff rates are put on exports of raw materials. Importers and exporters have to face tariff restrictions. They are required to fulfil several customs formalities and rules. Foreign trade policy, procedures, rules and regulations differ from country to country and keep on changing from time to time. 7. Documentation: Both exporters and importers have to prepare several documents which involve expenditure of time and money. 8. Study of foreign markets: Every foreign market has its own characteristics. It has requirements, customs, weights and measures, marketing methods, etc., of its own. An extensive study of foreign markets is essential for success in foreign trade. It is very difficult to collect accurate and up to date information about foreign markets. 9. Problems in payments: Every country has its own currency and the rate at which one currency can be exchanged for another (called exchange rate) keeps on fluctuating change in exchange rate create additional risk. Remittance of money for payments in foreign trade involves much time and expense. Due to wide time gap between dispatch of goods and receipt of payment, there is greater risk of bad debts. 10. Frequent market changes: It is difficult to anticipate changes in demand and supply conditions abroad. Prices in international markets may change frequently. Such changes are due to entry of new competitors, changes in buyers' preferences, changes in import duties and freight rates, fluctuations in exchange rates, etc. 11. Investment for longer period: There is longer time gap between supply of goods and receipt of payment. Therefore, the exporter's capital remains locked up over a longer period. 12. Intense competition: Traders who want to sell goods abroad have to face severe competition from different countries. Considerable market research is necessary to ensure suitability of product in foreign markets. Heavy expenditure on advertising and sales promotion may be necessary.
India after Independence Essay
Before independence our country was at the mercy of her foreign rulers. They did whatever they liked for the good of their own country. After independence much has been done to improve the condition of the masses. Some of the important achievements of free India made during the last fifty years are as follows. In the economic field, unprecedented progress has been made. Our five year plans have been successfully completed. Many Multipurpose projects have been taken in hand. Bhakra Nagal, Hirakud and Damodur valley projects have been completed. Many new factories have been started. Sindri Fertilizers Factory, Haldia Fertilizer Complex, Barauni and Guna Fertilizer Factory etc., are producing chemical fertilizers. Important Steel plants are fulfilling our requirements of steel. The per capita income has been raised. Our exports have been increasing in different spheres. The difficult food problem has been solved. To-day there is enough food for all. Power –generation has also been increased several folds. A net-work of ordinance factories has been established and most sophisticated weapons for the defense of the country are being produced. In 1989, India successfully fired Agni, a long range missile. Since then ‘Akash’ surface to air long range missile, ‘Trishul’, ‘Nag’ and recently ‘Prithivi’ surface to surface short range missile have been launched. This shows further advance in the growth of the country’s science and technology. Rapid advances have been made in the field of electronics and comprehensive program of computerization is also under way. Thus gradually, but steadily, we are achieving self-sufficiency and stability in the economic field. Free India has also made rapid advance in the field of science and technology. Atomic energy has been successfully used for power generation. India successfully conducted under ground atomic tests for peaceful purposes. Now India is nuclear power nation. The launching of “Aryabhatta”, “Rohini”, “Apple” INSAT-1 and INSAT-1(D) satellites marks the entry of India in to the space age. Since then many more multipurpose satellites have been sent in to outer space. India Space Organization had completed four launchers of the Satellite Launch Vehicle-3(SLV-3) for of Augmented Satellite Launch Vehicles (ASLV) and two developmental PSLV. With this India became the fifth nation in the world capable of launching 1000 kg satellite in its intended orbit. Now it is ready to enter the GSLV programme through which India will not only have vastly improved telecommunication capability, but also satellite monitoring capabilities which will be of great value of our security. Revolutionary changes have also been brought about in the political field. Our country is now sovereign Democratic Republic. All citizens have equal rights in the eyes of law, irrespective of their caste, creed, sex and religion. To bring democracy to the villages, Panchayats have been established and Panchayati Raj has become a reality. The launching of the Jawahar Rozgar Yojna is another revolutionary step to improve the conditions of rural poor. There is a general awakening among the people. They have begun to understand their rights and duties. We may find men in the street discussing various political problems with great interest. Thus, we are enjoying the fruits of freedom. We may hold our heads high due to the success of foreign policy, which has raised the prestige of the country. Achievements in the social sphere are also clearly visible. The Zamindari system has been abolished. The tiller of the land is now its owner. Untouchability is a legal offence today. To drive out the demon of drink
from society, prohibition has been introduced. Socialistic pattern of society is the aim towards which our country is making rapid progress. To reduce the inequalities in the industrial field many industries have been nationalized. To bring about uniformity in weights and measures, the metric system has been introduced. Prostitution, in any form has been made legal offense. These achievements are of great social significance. Social security schemes have been introduced in some big industrial towns. The government is busy in clearing slums and constructing new houses for the industrial workers and the weaker sections of society. Lakhs of refugees came to India first from Pakistan, then from Bangladesh, and more recently from Ceylon. But India has successfully solved the refugee problem. This is a mighty achievement. So it becomes clear that no aspect of life has been left untouched. India has successfully followed the policy of noon alignment. As a result of India’s efforts, the nonalignment movement has become a force in the world affairs. India’s voice now carries weight in international forums. Important laurel won by India recently is the obtaining of the sole right for the exploration of a very large area of the Indian Ocean for its mineral wealth. Similarly, India has established its base in the Antarctica for exploration and research in the difficult region. But this long list of free India’s achievements should not make us proud. We should not feel satisfied by looking at our achievements. We should keep in mind the problems which are yet to be solved. The masses of country are still poor and backward. Many social evils still prevail. Corruption is widespread. Terrorism is raising its ugly head in several arts of the country. The balance of payment position is difficult and threat sanctions are looming large. To face various economic problems a comprehensive programme of economic reforms has been undertaken. Economic polices have been liberalized, a number of controls have been removed, and multinationals have now been allowed to operate freely in the country. Private enterprise has also been encouraged, and Indian capitalists have been invited on a large scale to set up industries in various field. Above all the appeal of democracy has depended over the years. This style of governance has neatly fitted the lifestyle of a majority of Indians. Democracy now cuts across the parties, educational levels, classes, castes, religions, and gender and ethnics divisions. Indeed India democracy today despite all its institutional problems is stronger in the minds of people then it ever was. The social and territorial spread of legitimacy has survived even the sharp decline in the peoples trust in politicians in recent years. However with faith in our leaders and our capacity for works, we are sure to overcome our present difficulties. The present difficulties should not discourage us. Free India is destined to become a powerful nation of the world.
Brief notes on India’s Foreign Trade
rior to British rule, India was famous in the world for its exportable items, which were bused on cottage and small scale industries. But during the British period India was forced to change its pattern of trade, exporting only the raw materials for British industries and importing the final products to provide a market of the English industries. Before the Second World War, India was bound to export more than its import, in order to meet the unilateral transfer payments in the shape of salaries and pensions for British officials in India, resulting in a favourable balance of trade position. The direction of trade was pointed towards U.K. amounting 31 per cent of India's total import during 1938-39. However a considerable change in the composition, pattern and direction of trade took place during the planning era, though the deficit in the balance of payment account is increasingly is becoming high. Foreign Trade during Plan Periods The First Plan: During the First Plan, the deficit in the balance of payment was worked out to be Rs 108 crores per annum. This was basically due to the import of developmental capital goods. However, there was no change in the export side during the plan period. The Second Plan (1956-57-60-61): The import of the country increased significantly during the 2nd plan period, as there was a change in the very structure of the economy. Due to the implementation of the Mohalanobis model, huge investment was to be made on basic and key industries. Foreign technology, technical know-how and concessional capital constituted the main items of India's import. Further to meet the internal shortage, enough amounts of food grains had to be imported. The export during the period also slowed down and the much needed diversification of export and exportpromotion did not materialise. There was an acute shortage of foreign exchange due to the unfavorable balance of payment situation. The Third Plan (1961-62-65-66): During the 3rd plan period, the average import of the country was at Rs 1,224 crores, while the corresponding import was only Rs. 747 crores, resulting in a huge trade deficit. The basic reason for this situation is the need for higher import for our materials and industrial and technical know-how and food grains during the period. Devaluation of 1966 and period up to 1973-74: Due to a continuous adverse balance of payment situation since 1951, acute foreign exchange position, growing international borrowing from abroad, India was compelled to devaluate the value of Rupee by 36.5 per cent in June 1966. Due to failure of agriculture, import of food grains became necessary which resulted in a further trade deficit.However, due to favourable agriculture and reduction of food grain import, along with import restriction and export promotion measures, during 1972-73, the country was able to have a favourable balance of trade position. But in the next year, due to increase in the price of petroleum products, chemical fertilizer and newsprint in the global market again the deficit cropped up. However, the magnitude of deficit during 4th plan period was less than its earlier period. The Fifth Plan (1974-75): The value of imports during this period touched a very high level due to increase in prices of petroleum products, fertilizer and food grains. Export during the period also increased significantly, in fish, fish preparations, coffee, groundnuts, tea, cotton fabrics and ready-made garments. During 1976-77, the country experienced a trade surplus. However during 1977-78 and in the next two years due to a unsystematic liberal import policy, along with stagnant export, the balance of trade became negative. The Sixth and Seventh Plan: Due to a further increase in the price of petroleum products, the import bill increased from Rs. 6,814 crores in 1978-79 to Rs.13, 608 crores in 1981-82. The outcome was unprecedented trade deficit, though the export increased considerably during the period. The average annual import during the 7th Plan was Rs 28,874 crores but export average stood up at Rs. 18,033 crores. The trade deficit compelled the Govt. to borrow Rs. 6.7 billions from World Bank and IMF. Foreign trade from 1989-90 to 93-94: In spite of a rise in exports, trade deficit shot up to a high figure of Rs. 10,635 crores due to increase in import value as an outcome of Gulf War. During 1991-92, the Govt. went for drastic import reduction and took many policies to increase export. But export in dollar-term did not rise. This was mainly due to the decline in export to Rupee Payment Area (RPA) by 42.5% in dollar terms during 1991-92. During 1991-93, trade-deficit further worsened. The import of oil rose by 13.5%. The disintegration of USSR resulted in an export decline. However, the exports to General Currency Area (GCA) rose by 10.4% in 1992-93, but in RPA it further declined. During 1993-94, export promotion measures, export increased by 19.6%, while the import increased by 6.1%. This resulted in a decline in trade deficit, which requires further to be sustained over a long period of time. The main features of foreign trade are as follows: (1) Growing value of trade, (2) Large growth of import, (3) Inadequate expansion of exports. (4) Resulting widening trade deficit.
Introduction: The World Trade Organization is a Multi-lateral organization which facilitates the free flow of goods and services across the world and encourages fair trade among nations. The result is that the global income increases due to increased trade and there is supposed to be overall enhancement in the prosperity levels of the member nations. To put it in brief WTO encourages a multi-lateral trading system within its member countries. Origin and Evolution of WTO: - GATT to Uruguay WTO is of a very recent origin, it came into formal existence on January 1st 1995. As an organization it has vast powers and functions than what its predecessor GATT (General Agreement on Tariffs and Trade) had, the objectives and goals of both being broadly the same. GATT came into existence in the year 1948, after long negotiations to form an organization called ITO immediately after the Second World War did not materialize. The ITO was supposed to be the third international organization in the "Golden Triangle" that was supposed to come into existence, the first two being IMF and World Bank. To begin with 23 countries became founding GATT members (officially, "contracting parties"). GATT remained the only multilateral instrument governing international trade from 1948 until the WTO was established in 1995. There were several controversies on whether the GATT had actually contributed to enhancement of world trade and did it serve its purpose of a multi-lateral trading organization. The liberalization of international trade during GATT era in its true sense was always debatable. However, it is very clear that over the period of 47 years of its existence, GATT was successful in initiating a process of tariff cutting in several groups of manufactured goods. Moreover the signatories in the GATT increased from 23 to more than 100 in a short span, ratifying the fact that being in the system was proved and considered more beneficial than not being in it. On the other front, the internal and domestic economic problems and fluctuations made some economies to go back to increase the levels of protection and increase trade barriers to enable faster domestic growth and recovery. The problem was not just a deteriorating trade policy environment, but some other serious issues. GATT negotiations did not include services and agricultural trade in its gamut. As the world trade grew in size, the share of services trade along with that of merchandise started to increase leading to the insufficiency of the GATT principles to cover the expanding aspects of ever evolving global trade. As a result, these loopholes were taken as advantage by many trading countries, resulting in a lopsided development of world trade. These and other factors convinced GATT members that a new effort to reinforce and extend the multilateral system should be attempted. That effort resulted in the Uruguay Round, the Marrakesh Declaration, and the creation of the WTO. WTO - Some Basic Facts: Location: Geneva, Switzerland Established: 1 January 1995 Created by : Uruguay Round negotiations (1986-94) Membership: 148 countries (as of April 2005) Budget: 155 million Swiss francs for 2003 Secretariat staff: 560 Head : Director-General, Supachai Panitchpakdi
What are its Objectives and Functions? The overriding objective of the World Trade Organization is to help trade flow smoothly, freely, fairly and predictably; to meet its objective WTO performs the following functions ? ? ? ? ? ? ? Administering W.T.O Trade Agreements. Acting as a Forum for trade negotiations. Settling and Handling Trade disputes Monitoring and reviewing national trade policies, Assisting the member in trade policies through technical assistance and training programmes Technical assistance and training for developing countries. Co-operation with other International Organization
What are its Principles? The agreements of WTO cover everything from trade in goods, services and agricultural products, these agreements are quite complex to understand, however all these agreements are based on some simple principles; ? Non-Discrimination This is a very simple principle which advocates that every member country must treat all its trading partners equally without any discrimination, meaning that if it offers any special concession to one trading partner, such concessions need to be extended to its other trading partners as well in entirety. This principle effectively gets translated into "MFN" or the Most Favored Nation. However, this principle is relaxed in certain exceptional cases, such as if country X has entered into a regional trade agreement with another country Y, then the concessions extended to Y country need not be extended to other non-members of the agreement. Besides these developing countries facing Balance of Payment problems also get concessions, and if a country can prove unfair trade it can retain its power to discriminate. The Non-discrimination principle is also translated as a principle that would ensure "National Treatment" to all the goods, services or the intellectual property that enters any other countries national borders. ? Reciprocity This Principle reflects that any concession extended by one country to another need to be reciprocated with an equal concession such that there is not a big difference in the countries Payments situation. This was further relaxed for developing countries facing severe Balance of Payments crisis. This principle along with the first principle would actually result in more and more liberalization of the world trade as any country relaxing its trade barriers need to extend it to all other members and this would be reciprocated. Thus progressive liberalization of the world trade was aimed at by WTO. ? Transparency The multilateral trading system is an attempt by governments to make the business environment stable and predictable. Thus this principle ensured that there is lots of transparency in the domestic trade policies of member countries. Moreover, the member countries are required to sequentially phase out the non-tariff barriers and progressively reduce the tariff barriers through negotiations.
Thus, these principles were primarily to serve the purpose of freer and fair trade and also to encourage competitive environment in the global market. This was further supposed to enhance development and Economic reforms in the developing countries over a period of time in a phased manner. What are the Major Agreements in WTO? There are several agreements which are agreed upon by member countries in the last round of negotiations under GATT, The Uruguay round (1986-94), which resulted in the formation of WTO The complete set runs to some 30,000 pages consisting of about 60 agreements and separate commitments (called schedules) made by individual members in specific areas such as lower customs duty rates and services market-opening. The main agreements cover vast areas from tariff reduction on specific manufactured goods and services; other agreements deal with trade in Textiles, Agriculture, Services; some other agreements talk about trade in Intellectual Property, cross-border Investments, anti-dumping duties, CVD's, Safeguards, and finally there are few agreements that aim to reduce the Non-Tariff Barriers that hinder trade between countries. Let us now discuss the decision making process followed to reach consensus for these agreements at WTO, the organizational structure and then in detail look at the impact of these agreements on the member countries with specific reference to India. The Decision Making Process and Organizational Structure of WTO Decisions are made by all the members together what we can term as by consensus. A majority vote is also possible but it has never been used in the WTO, and was extremely rare under the WTO's predecessor, GATT. After the decision by individual countries, the WTO's agreements have been ratified in all members' parliaments. The structure of WTO is shown in Figure 1. The WTO's top level decisionmaking body is the Ministerial Conference which meets at least once every two years. The Fifth WTO Ministerial Conference was held in Cancún, Mexico from 10 to 14 September 2003. Below this is theGeneral Council (normally ambassadors and heads of delegation in Geneva, but sometimes officials sent from members' capitals) which meets several times a year in the Geneva headquarters. The General Council also meets as the Trade Policy Review Body and the Dispute Settlement Body. At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS) Council report to the General Council. Numerous specialized committees, working groups and working parties deal with the individual agreements and other areas such as the environment, development, membership applications and regional trade agreements. The WTO has nearly 148 members, accounting for over 97% of world trade; there are many other countries who are planning to become the members.
How Does the Agreements affect the Member Countries? The World Trade organization was established with an objective of enhancing the free and fair trade, improve growth rate of world trade by encouraging members to reduce trade barriers and to increase the overall prosperity in the global economies. As given in the official document of WTO following are the ten ways in which the organization affects the world Trade and its member countries. 1. 2. 3. 4. The system helps promote peace Disputes are handled constructively Rules make life easier for all Freer trade cuts the costs of living
5. It provides more choice of products and qualities 6. Trade raises incomes 7. Trade stimulates economic growth 8. The basic principles make life more efficient 9. Governments are shielded from lobbying 10. The system encourages good government However, there are several groups that are against this multi-lateral organization, and they continuously propagate against the agreements considering them as being dis-advantageous to the developing countries and several other sectors in the economy. Following are some of the general aspects of disagreements on the principles and existence of WTO. 1. The WTO dictates policy 2. The WTO is for free trade at any cost 3. Commercial interests take priority over development … 4. It takes over the environment aspects to give concessions to some countries for raising barriers. 5. Some issues which are continuously raised in the ministerial for discussions but never discussed are over health and safety 6. The WTO destroys jobs, worsens poverty 7. Small countries are powerless in the WTO 8. The WTO is the tool of powerful lobbies 9. Weaker countries are forced to join the WTO 10. The WTO is undemocratic How Does it Affect India? India is a founder member of World Trade Organization, and also treated as the part of developing countries group for accessing the concessions granted by the organization. As a result, there are several implications for India for the various agreements that are signed under WTO. Let us understand each agreement in general, what it means and its implications for India in specific. 1. India was a signatory of the General Agreement on Tariffs & Trade (GATT), and as a part of the commitment had to change several laws and policies; the major changes that were incorporated were as a follows ? Reduction of peak and average tariffs on manufactured products ? Commitments to phase out the quantitative restrictions over a period as these were considered non-transparent measure in any countries policy structure. The result of this agreement as mentioned earlier was limited as, GATT was only an agreement and there was no enforcing agency to strictly implement the clauses and punish the country which breaks the clauses. Thus the impact was partial. However, with WTO coming into effect, the competition from imports for the domestic firms has increased. WTO had the deadline till 2005, for the domestic policy was supposed to phase out the QR's; for those countries which face severe balance of payments problems special concession period was given. Thus it is very clear that only those firms that have competitive advantage would be able to survive in the long run, and those firms which are weak would fade into history in the process. 2. Trade Related Investment Measures (TRIMS) The agreement relates to investments originating from one country to another. The agreement prohibits the host country to discriminate the investment from abroad with domestic investment, which implies that it favours national treatment of foreign investment. Besides this, there are several other clauses of the agreement totaling to 5 in this segment, one agreement requires investment to be freely allowed
within domestic borders without any maximum cap on it. Another restricts to impose any kind of export obligation or import cap on the investment. Another requires that there should not be any domestic content requirement on foreign firms operating and manufacturing in other countries. These agreements have a direct impact on our Trade, Investment and foreign exchange policy, domestic annual budgetary proposals and also on the industrial policy. Implementation process for the above requires proper preparation by the industries and policy makers, as sudden change may result in loss of revenue and decline of foreign exchange for the government and economy, and it may result in decline of market share and profitability of businesses, decline in employment opportunities and over all decline in growth. 3. Trade Related Intellectual Property Rights (TRIPS) An intellectual property right refers to any creation of human mind which gets legal recognition and protection such that the creator of the intangible is protected from illegal use of his creation. This agreement includes several categories of property such as Patents, Copyrights, Trademarks, Geographical indications, Designs, Industrial circuits and Trade secrets. Since the law for these intangibles vastly varied between countries, goods and services traded between countries which incorporated these intangibles faced severe risk of infringement. Therefore the agreement stipulated some basic uniformity of law among all trading partners. This required suitable amendment in the domestic IPR laws of each country. Since this process is not a simple one, a time period of 10 years was given to the developing countries. As a result, in India there was a requirement to change the patents act, Trade and merchandise mark act and the copyright right act. Besides these main laws, other related laws also required changes. The main impact of this is on industries such as pharma and bio-technology, because now with the law in place, it is not possible to reverse engineer the existing drugs and formulas, change the process and produce the same product. Now new investment in fresh research is required. This is quite a burden for small industries and there is a possibility that they are thrown out of business due to competition. Besides these, the technology transfer from abroad is expected to become costly and difficult. Strict implementation of law is very important in India, otherwise there could be disastrous affect on the revenue of industries which invest millions of rupees in Research and development if their products get infringed. 4. Agreement on Agriculture (AOA): The Agriculture happens to be one of the most protected sectors in all the countries without any exceptions, and therefore an agreement on the agricultural issues have always been evading and debated strongly by all the countries involved in trade in agriculture. The agreement on agreement deals with market access, Export subsidies and government subsidies. Broadly, as of now the requirement is to open up the markets in specific products in market access and incase of subsidies, it is to go for tarrification and phase it out eventually or reduce it to bound limits. The immediate impact of the agreement would be on the policy makers to scrutinize all the items under subsidy, QRs and tariffs. However, the calculation of AMS reveals that the subsidy given to Indian farmers are much below the acceptable levels and therefore need not be changed. Looking from other perspective, the reduction of tariffs and subsidy in export and import items would open up competition and give a better access to Indian products abroad. However, the concern is on the competitiveness and sustainability that the Indian farmer would be able to prove in the long run once the markets open up. Thus there is a requirement to change policy support to meet the changing needs of Indian agriculture
to gear it up for future. 5. Agreement on Sanitary and psyto-sanitary measures (SPM): this agreement refers to restricting exports of a country if they do not comply with the international standards of germs/bacteria etc… if the country suspects that allowing of such products inside the country would result in spread of disease and pest, then there is every right given to the authorities to block the imports. Indian standards in this area are already mentioned and therefore there is no need to change the law, but the problem is that of strictly implementing the laws. There is an urgent need to educate the exporters regarding the changing scenario and standards at the international arena, and look at the possible consequence and losses to be incurred if the stipulations are not followed. Therefore, to meet the standards certain operational changes are required in the industries such as food processing, marine food and other packed food that is being currently exported from India. 6. Multi-Fiber Agreement (MFA): This agreement is dismantled with effect from 1 January 2005. The result was removal of QR on the textile imports in several European countries. As a consequence a huge textile market is opened up for developing countries textile industry as well as for other countries that have competitive advantage in this area. The immediate impact is on the garment and textile manufacturers and exporters. However, it still needs to be seen whether the industry is able and ready to take advantage of the large markets. This requires quite an amount of modernization, standardization, cost efficiency, and customization and frequent up gradation of designs to meet the changing need of global customers. The dismantling of QR also mean more competition to Indian textile exporters and therefore, it becomes imperative to enhance the competitiveness in niche areas. Besides these major agreements there are several other agreements such as agreement on Market Access , which propagates free market access to products and reduction of tariff and non-tariff barriers; agreement to have Safeguard Measures if there is an import surge and it is liable to affect the domestic industries in the transition economies. These measures can include imposing QR for a certain period and also imposing tariffs on the concerned products. There are other agreements that call for direct reduction of S ubsidies on Exports, which are not permissible, and phasing it out over a period of time. Besides these there are other Counter-Veiling Duties (CVD) that are permitted to be used in certain conditions. These are supposed to have an impact positive if they help the industries and negative if they reduce the cost competitiveness. The trading countries are allowed to impose an Anti-Dumping Duty (ADD) against imported products if the charge of Dumping is claimed against them. The requirement is to prove that the product is being sold at a price, which results in material injury to the domestic industries. There are several cases in which the duty is imposed but it still remains to be proven by the Dispute settlement tribunal in case the other trading party opposes the duty imposed as "unfair". However, the proposal always should come from the representatives of the industries affected; this may result in a problem, as small industries voice may remain unheard in the process. Certain Other Unresolved Issues: There are several clauses in each of the above agreements; where there has been no consensus arrived. Besides that there are several other cases where there is no consensus on the entire agreement itself, which means that these are still in their conceptual and drafting stages. Some of such agreements are on Labour Standards and core social clauses, which intend to impose a labour standard and certain norm against exploitation of labour by the organization where they work. Such standards are likely to result in banning of certain items exports to developed world causing severe damage to industries such as Carpet manufacturing, crackers, leather, handicrafts and sports goods. There is another agreement, which is still under discussion by member countries; this is on Trade and
Environment. Some countries wish to impose restrictions on trade on environmental grounds. The agreement revolves around protecting global environment by enforcing standards on production and consumption. The ranges of clauses are from production, packaging to transportation of the goods as specified by norms. The main impact of this clause would be on industries such as seafood, food processing and drugs and chemical manufacturing. There would also be a overall impact on the export business as the rules related to packaging would be very stringent. Another agreement where the consensus is yet to be reached is on Trade and Investment. The main objective of this agreement is to enable a free operating environment for foreign investment in host countries such that there is minimum interference and equal rights. There would be a direct impact on the foreign investment policy and trade policy of the government with a long-term impact on balance of payment and foreign exchange position of the country. This agreement would affect almost all industries and services without an exception. However the specific impact is expected on auto components and small retailers. Trade and Competition is another agreement on which the discussions are going on to reach a consensus. The main aim of this is to stop the business practices that distort competition in any way and to curb monopolistic growth in trade. The agreement would have an impact on the MRTP act, which needs to be replaced by the new competition law, the process for which has already started. These changes would result in a more competitive environment and it would also be a deterrent for big business houses if they wish to expand further in the same area. Thus, the formation of cartels and mergers and acquisitions would be restricted to a great extent. Transparency in Procurements made by the Government is one such clause where it is being debated to a large extent. This is particularly of concern to developing countries as the role played by the government in a countries development is much higher than what it is in other developed countries. This would have a serious impact on the way the government and other public sector units approach the domestic procurement. This would imply that no special preference would be given to the domestic suppliers and they also need to compete on a price basis for getting orders from domestic government. This clearly can mean that many government suppliers may lose out in competition with efficient and low cost foreign suppliers. Major Conclusions The Indian economy has experienced a major transformation during the decade of the 1990s. Apart from the impact of various unilateral economic reforms undertaken since 1991, the economy also had to reorient itself to the changing multilateral trade discipline within the newly written GATT/WTO framework. The unilateral trade policy measures have encompassed exchange-rate policy, foreign investment, external borrowing, import licensing, custom tariffs, and export subsidies. The multilateral aspect of India's WTO commitments is regarding trade in goods and services, trade-related investment measures, and intellectual property rights. After analyzes of the economic effects on India and other major trading countries/regions of the Uruguay Round (UR) trade liberalization and the liberalization that might be undertaken in a new WTO negotiating round. India's welfare gain is expected to be 1.1% ($4.7 billion over its 2005 GDP) when the UR scenarios get fully implemented. The additional welfare gain is an estimated 2.7% ($11.4 billion) when the assumed future WTO round of multilateral trade liberalization is achieved. It is expected that Resources would be allocated in India to the labor-intensive sectors such as textiles, clothing, leather and leather products, and food, beverages, and tobacco. These sectors would also experience growth in output and exports. Real returns to both labor and capital would increase in the economy. However as mentioned above in the analysis of each agreement there is a serious and urgent need to re-look the strategies followed by individual firms in the changing context of increasing competition and opened markets. As said time and again there is no reversal of agreements, so what is
required is to make internal policy changes at macro, meso and micro level to suit the changed external environment.
Abstract: One of the most dramatic events that have taken place in later part of 20th century was culmination of GATT 1947 into WTO (The world Trade organization), which came into being on 1st January 2005. This WTO has set expectations high in various member countries (by now 149 including latest addition of Saudi Arabia) regarding spurt in world trade where India has insignificant share in the pie-Only 0.75% at the most. Even in IT exports the share of Indian exporters is just peanuts in view of overall world market. Since formation of WTO there have been regular meetings of Ministerial Conferences (Highest Policy level body of WTO) religiously every 2 years and 5 such meetings have taken place while world prepares for the Hong Kong meeting to take place shortly, the sixth one. While 5th meet at Cancun, Mexico was more or less failure, the earlier one at Seattle, USA was received with brickbats from environmentalist and Labor union Groups protesting against WTO regime. It is statistical fact that world trade has definitely grown since 1995 thereby giving indicators that international trade reforms do play important role in boosting economic development of various countries. Problems facing India in WTO & its Implementation: But there are several problems facing these Multilateral Trade agreements: - Predominance of developed nations in negotiations extracting more benefits from developing and least developed countries - Resource and skill limitations of smaller countries to understand and negotiate under rules of various agreements under WTO - Incompatibility of developed and developing countries resource sizes thereby causing distortions in implementing various decisions - Questionable effectiveness in implementation of agreements reached in past and sincerity - Non-tariff barriers being created by developed nations. - Regional cooperation groups posing threat to utility of WTO agreement itself, which is multilateral encompassing all member countries - Poor implementation of Doha Development Agenda - Agriculture seems to be bone of contention for all types of countries where France, Japan and some countries are just not willing to budge downwards in matter of domestic support and export assistance to farmers and exporters of agriculture produce. - Dismantling of MFA (Multi Fiber Agreement) and its likely impact on countries like India - Under TRIPS question of high cost of Technology transfer, Bio Diversity protection, protection of Traditional Knowledge and Folk arts, protection of Bio Diversities and geographical Indications of origin, for example Basmati, Mysore Dosa or Champagne. The protection has been given so far in wines and spirits that suit US and European countries. Implications for India It appears that India does not stand to gain much by shouting for agriculture reforms in developed countries because the overall tariff is lower in those countries. India will have to tart major reforms in agriculture sector in India to make Agriculture globally competitive. Same way it
is questionable if India will be major beneficiary in dismantling of quotas, which were available under MFA for market access in US and some EU countries. It is likely that China, Germany, North African countries, Mexico and such others may reap benefit in textiles and Clothing areas unless India embarks upon major reforms in modernization and up gradation of textile sector including apparels. Some of Singapore issues are also important like Government procure, Trade and Investment, Trade facilitation and market access mechanism. In Pharma-sector there is need for major investments in R &D and mergers and restructuring of companies to make them world class to take advantage. India has already amended patent Act and both product and Process are now patented in India. However, the large number of patents going off in USA recently, gives the Indian Drug companies windfall opportunities, if tapped intelligently. Some companies in India have organized themselves for this. Excerpts from Speech of Ramkrishna Hegde, the then Minister, at Geneva in 1998"In order to make WTO an effective multilateral body, which serves the objectives for which it was set up, it is necessary to go back to the basic principles. The Uruguay Round negotiators had stated their intentions quite clearly in the Preamble to the Marrakesh Agreement establishing the WTO. They recognised "that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development. They recognized also "that there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development". The Objective of WTO Reiterated: It is very clear that the intention of the negotiators was to use trade as an instrument for development, to raise standards of living, expand production, keeping in view, particularly, the needs of developing countries and least-developed countries. The WTO must never lose sight of this basic principle. Every act of implementation and of negotiation, every legal decision, has to be viewed in this context. Trade, as an instrument for development, should be the cornerstone of all our deliberations, decisions and actions. Besides, the system should be seen to be equitable and fair. It must be used in such a manner that the letter and spirit of the Agreements is fully observed. The WTO Members must mutually support and encourage each other to achieve the final goal. It must be recognized that all Members should assume a negotiating rather than an adversarial posture. It should also be recognized that different economies have different features and structures, different problems, different cultures. The pace of change must be carefully calibrated to take into account such differences. All Members should guard against unilateral action that cuts at the root of multilateral agreement and consensus. Developing countries have generally been apprehensive in particular about the implementation of special and differential treatment provisions (S&D) in various Uruguay Round Agreements. Full benefits of these provisions have not accrued to the developing countries, as clear guidelines have not been laid down on how these are to be implemented. " The first Ministerial Conference held in 1996 in Singapore saw the commencement of pressures toenlarge the agenda of WTO. Pressures were generated to introduce new Agreements on Investment, Competition Policy, Transparency in Government Procurement and Trade Facilitation. The concept ofCore Labor Standards was also taken up for introduction. India and the developing countries, which were already under the burden of fulfilling the commitments undertaken through the Uruguay Round Agreements, and who also perceived many of the new issues to be non-trade issues, resisted the introduction of these new subjects into
WTO. They were partly successful. The Singapore Ministerial Conference (SMC) set up open-ended Work Program to study the relationship between Trade and Investment; Trade and Competition Policy; to conduct a study on Transparency in Government Procurement practices; and do analytical work on simplification of trade procedures (Trade Facilitation). Most importantly the SMC clearly declared on the Trade-Labor linkage as follows: " We reject the use of labor standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question. In this regard we note that the WTO and ILO Secretariat will continue their existing collaboration". Not many people in this country are aware that there is a dispute settlement system in the WTO. This is at the heart of the WTO and sets it apart from the earlier GATT. Countries like the USA and the European Union have brought cases against us and won these cases like in pharmaceutical patents. India too has complained against the US and Europe and it too has won its fair share of disputes in areas like textiles. India must effectively use this mechanism to extract fair share in world markets. It would be advantageous for India to give concrete shape to SAARC economic forum or Free market and align itself with ASEAN. What India should do? The most important things for India to address are speed up internal reforms in building up worldclass infrastructure like roads, ports and electricity supply. India should also focus on original knowledge generation in important fields like Pharmaceutical molecules, textiles, IT high end products, processed food, installation of cold chain and agricultural logistics to tap opportunities of globalization under WTO regime. India's ranking in recent Global Competitiveness report is not very encouraging due to infrastructure problems, poor governance, poor legal system and poor market access provided by India. Our tariffs are still high compared to Developed countries and there will be pressure to reduce them further and faster. India has solid strength, at least for mid term (5-7 years) in services sector primarily in IT sector, which should be tapped and further strengthened. India would do well to reorganize its Protective Agricultural policy in name of rural poverty and Food security and try to capitalize on globalization of agriculture markets. It should rather focus on Textile industry modernization and developing international Marketing muscle and expertise, developing of Brand India image, use its traditional arts and designs intelligently to give competitive edge, capitalize on drug sector opportunities, and develop selective engineering sector industries like automobiles & forgings & castings, processed foods industry and the high end outsourcing services. India must improve legal and administrative infrastructure, improve trade facilitation through cutting down bureaucracy and delays and further ease its financial markets. India has to downsize non-plan expenditure in Subsidies (which are highly ineffective and wrongly applied) and Government salaries and perquisites like pensions and administrative expenditures. Corruption will also have to be checked by bringing in fast remedial public grievance system, legal system and information dissemination by using e-governance. The petroleum sector has to be boosted to tap crude oil and gas resources within Indian boundaries and entering into multinational contracts to source oil reserves. It wont be a bad idea if Indian textile and garment Industry go multinational setting their foot in western Europe, North Africa, Mexico and other such strategically located areas for large US and European markets.
The performance of India in attracting major FDI has also been poor and certainly needs boost up, if India has to develop globally competitive infrastructure and facilities in its sectors of interest for world trade.
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